Old Time Pottery files Chapter 11 Bankruptcy in Nashville
Discount home décor retailer Old Time Pottery and its holding company filed for protection under Chapter 11 of the U.S. Bankruptcy Code in Nashville on June 28, 2020. While the bankruptcy cases are still in their early days, it looks like the main goal is to renegotiate their store leases to increase profitability. Landlords will want to plug in early. The U.S. Bankruptcy Code gives a company wide powers to “assume” or “reject” commercial leases. However, landlords have extensive rights under the Bankruptcy Code too. We expect much of these cases to revolve around these lease renegotiations.
Prior Bankruptcy & History
This is OTP’s second trip through bankruptcy court. It previously filed in August 2009 and had a plan confirmed in May 2010. The prior case was caused by the 2008 recession, echoing the circumstances alleged to be behind the current case. Prior to that case, its then-bank (SunTrust) reduced its line of credit from $40 million to $18 million, and then refused advances on the line entirely, forcing the company into bankruptcy.
OTP successfully reorganized in the prior case with a new $20 million loan from First Merit Bank in Akron, Ohio. Unsecured creditors were paid 75% on their allowed claims, an unusually high-percentage payout for bankruptcy cases.
In 2014, OTP was acquired by Comvest Investment Partners, an investment fund based in New York. Financing for the transaction was provided by PNC Bank (which remained OTP’s bank until just before the bankruptcy). As of the current bankruptcy filing, PNC was owed $28.2 million.
We expect much of these bankruptcy cases to revolve around the lease renegotiations.
Declaration of OTP’s CFO
OTP filed the Declaration of Jonathon Tyburski, the OTP’s CFO, on the first day of these bankruptcy cases. The declaration can be found at Docket #19 and is a “must read” document. The declaration is a lengthy description of the OTP’s version of why they had to file bankruptcy and what they would like to accomplish in bankruptcy court.
OTP is a discount home décor retailer based in Murfreesboro, Tennessee. Before bankruptcy, it operated 43 locations in 11 states. As of the bankruptcy, OTP employed 800 full- and part-time employees, most of whom are paid hourly and work in the retail stores. Old Time Pottery, LLC is the operating entity, and is solely owned by the other debtor (Old Time Pottery Holdings, LLC). Old Time Pottery Holdings has no assets beyond its membership interest in the operating entity.
Upon filing the bankruptcy cases, OTP proposed to close 4 of their 43 stores at the start of the case, with further potential closures to follow. OTP attributes the store closings, and the need to file the bankruptcy case, to the impact of COVID-19 on retail sales.
OTP leases its locations from landlords, so it does not have any real estate assets. Instead, its assets consist of inventory, receivables, and cash. OTP states that its inventory (at cost), receivables, and cash total approximately $50 million.
OTP’s Debt Structure
OTP’s pre-bankruptcy loan was with PNC Bank. The loan amount is approximately $28.2 million. PNC is allegedly secured in all or substantially all of the company’s assets, including inventory, cash, accounts, and receivables. If true, and if the $50 million valuation of assets were to hold up, then PNC would be an “oversecured” creditor, meaning its loan amount would be less than the value of its collateral. Creditors will want to investigate the value of the collateral and whether PNC is oversecured.
Commencement and Status of Bankruptcy Case
OTP filed their voluntary Chapter 11 case on June 28, 2020. OTP filed a number of first day motions, which were heard on July 1, 2020, and were granted on an interim basis.
The next big event in the case will be a further hearing on OTP’s motion for DIP financing, with the hearing set for July 22, 2020 by Zoom. Also for hearing on this same day will be the motion to close four stores and engage a consultant to manage the closures and sales. (Of note, the consultant is affiliated with the proposed DIP financing company.)
Looking Forward – All About the Leases
OTP is making it clear that they want to reorganize with fewer locations. For this reason, going forward, these bankruptcy cases will largely focus on the companies many leases.
OTP has prepared heavily for this process. Prior to filing bankruptcy, they had already paid their lawyers over $600,000 since this crisis started. They have paid their financial advisor over $500,000. OTP is seeking Court approval to hire a consulting firm (SB360) to help them decide which stores to close. OTP is seeking Court approval to hire a separate consulting firm (Keen-Summit) to help them renegotiate leases.
Finally, OTP also has filed a motion to extend the time it has to assume or reject their store leases. We should expect that the Court will extend this deadline at least once. Landlords will want to assess how much they were owed on June 28, 2020, the day that the bankruptcy cases were filed. Landlords will want to make sure they get paid in full for all amounts due after the cases were filed. Landlords will also want to begin to assess what their “rejection damages” will be if OTP decides to reject their lease. These data points, along with market conditions for the property, will drive lease renegotiations with OTP.