Court Authorizes Saks Global Interim DIP Financing, Enabling Debtors to Maintain Going-Concern Operations Over Creditors’ Objections

At a late-ending hearing tonight, Judge Alfredo Perez granted the Saks Global debtors’ requests for first day relief, including interim DIP financing. The judge said he will enter the interim DIP order, subject to three “cosmetic” changes he asked the debtors to incorporate, as discussed on the record.

Upon entry of the interim DIP order, the debtors will be able to access $550 million in liquidity, including $400 million of new money under a $2.6 billion SGUS term loan DIP facility and incremental liquidity under a $1.5 billion ABL DIP facility.

The judge also granted interim approval of the SO5 Digital debtors’ cash collateral and cash management motions.

Although Amazon sought an adjournment of the DIP motion so that it could have at least 24 hours to litigate its rights, the request was denied. The debtors entered a freefall chapter 11, filing petitions Thursday evening, Jan. 13, and today, Jan. 14.

Amazon and Axonic, both creditors at the Saks Fifth Avenue HoldCo II, or HoldCo II, level, objected to the DIP in order to preserve their recovery rights. Under the DIP terms, assets of HoldCo II would be pledged as collateral. HoldCo II, which is a debtor entity, is the parent of two subsidiaries: (i) the owner of the Saks Flagship property, Saks Flagship Real Property LLC, which is a non-debtor; and (ii) the ground lessee, 12 East 49th Street LLC, which is a debtor entity.

In approving the DIP, Judge Perez found that based on record, the proposed DIP is the only actionable financing available to the debtors. The alternative would be a liquidation, the judge continued, in determining that the debtors have properly exercised their business judgment.

The judge also noted that the DIP has been “well-marketed” and “well-developed,” and no party is willing to finance the company without the HoldCo II “Flagship” assets – facts that the debtors solicited through testimony from CRO Mark Weinsten and James Baird of PJT Partners, the debtors’ investment banker.

Judge Perez also rejected the “false narrative” that the DIP would impose $1.5 billion in additional debt at HoldCo II – an argument advanced by Amazon – in light of the fact that these entities will have contribution rights from other subsidiaries with “significant” assets.

As to Amazon and Axonic’s “ultra vires” arguments that the DIP was not properly authorized at the HoldCo II entity level, these issues are not before the court today, the judge said.

During closing arguments, Todd Goren of Willkie Farr, counsel to the debtors, called Amazon’s corporate authority argument a “red herring.” Even if Amazon’s asserted consent rights were implicated with respect to the DIP at the HoldCo II level, it “does not make what happened here an ultra vires act” and “at most,” Amazon would have a breach of contract claim.

Goren argued there is “nothing unusual here” with the debtors pledging assets to fund critical operations, and despite Amazon’s arguments, the Global debtors and HoldCo II share an identity of interest.

As to Axonic’s objection, Goren dismissed it. According to Goren, Axonic is a creditor of HoldCo II with an equity pledge of debtor 12 East 49th Street LLC, which in turn, is pledging assets for the DIP. He added that even if Axonic exercised its put option, it would be an equity holder without any right to adequate protection.

Goren also argued that the petition filings were valid as well as amendments to agreements related to the DIP financing.

Caroline Reckler of Latham & Watkins, counsel to Amazon, emphasized that HoldCo II “does not need this DIP at all,” and noted that the DIP should be analyzed on a debtor-by-debtor basis because there is no substantive consolidation of the debtors.

But, if approved on an interim basis, the DIP would severely impair Amazon’s recovery on its claim against HoldCo II, she said. The DIP is a way for the debtors and prepetition/DIP lenders to use the value of assets at HoldCo II to subsidize a recovery at their own estates, argued Reckler.

If the other debtors need the DIP, “just leave HoldCo II out of it,” Reckler asserted.

Ameneh Bordi of Sidley, counsel to Axonic, likewise questioned the propriety of the DIP, including amendments to underlying documents to enable the financing terms.

For example, Bordi pointed out that the Flagship property lease was amended days before the bankruptcy to reduce the monthly rent but this was not allowed for 10 years.

Landlords also spoke up against interim DIP approval, including Robert LeHane of Kelley Drye, counsel to a group of landlords. LeHane questioned whether the debtors were seeking interim DIP relief when the waivers under Bankruptcy Code sections 506(c) and 552(b) are being proposed upon entry of an interim order. The waivers should be subject to entry of a final order, LeHane argued.

In support of the DIP, Robert Britton of Paul Weiss, counsel to the DIP lenders and the ad hoc group, highlighted that no HoldCo II creditor would be primed under the DIP other than members of the group themselves.

Daniel Fiorillo of Otterbourg for the ABL DIP agent and prepetition ABL agent also weighed in. According to Fiorillo, the DIP is structured to provide the debtors an opportunity to maintain going-concern value (as opposed to enabling liquidations of retail stores). As such, the waivers are being requested as part of first day relief, he said.

At the outset of today’s hearing, Debra Sinclair of Willkie Farr, on behalf of the debtors, told the court that through the chapter 11 process, the debtors will seek to stabilize relationships with vendors, keep inventory flowing and ultimately achieve a right-sized balance sheet.

A second day hearing in the Global debtors’ cases is set for Feb. 13 at 10 a.m. ET, with objections due. Feb. 6 at 5 p.m. ET. The SO5 Digital debtors’ second day hearing is set for Feb. 23 at 10 a.m. ET, with objections due Feb. 6 at 5 p.m. ET.