A federal bankruptcy court judge in Delaware has granted preliminary approval of a request made by Quiksilver on Sept. 9 to place its ten U.S. subsidiaries under Chapter 11 protection. It also approved in principle a “plan sponsorship agreement” (PSA) that would allow Oaktree Capital Management, holder of 73 percent of $279 million worth of senior notes, to become the majority shareholder of the group by converting debt into shares.
As part of the PSA, Oaktree and Bank of America have proposed to provide $175 million in debtor-in-possession (DIP) financing to Quiksilver. The judge approved the release of an initial lot of $115 million in DIP financing as well as the liquidation of inventories at 27 stores owned by Quiksilver in the U.S., which are slated to be shut down. However, sources point out that the judge will make his final decision on the overall scheme after a hearing scheduled for Oct. 6, where unsecured creditors and other parties will have their say.
Reportedly, unsecured creditors stand to get only $7.5 million out of the proposed voluntary bankruptcy proceedings. Suppliers in the Far East and other trade creditors are owed about $105 million. Holders of the eurobonds issued by the company have already approved the financial reorganization plan, as they will be able to waive any technical default arising from it.
As of last July 31, Quiksilver had total debt of $826 million against assets of $337 million. The proposed plan would reduce the debt to just under $300 million, and allow the company to emerge from bankruptcy. Most of the debt is still linked to Quiksilver's unfortunate decision ten years ago to take over Skis Rossignol, only to resell it three years later with a loss of around $1.2 billion on the investment.
Quiksilver's operations in Europe, Asia and other parts of the world outside the U.S. are not included in the bankruptcy proceedings, the company pointed out, adding that it will also continue to operate normally in the U.S., with enough cash to pay employees, store owners, vendors and other creditors. The proceedings will also give it sufficient flexibility to complete the turnaround of its U.S. operations.
Pierre Agnès, a veteran of Quiksilver who became chief executive of the group last March, replacing Andy Mooney, pointed to “Oaktree's financial strength and expertise, deep experience working with companies in situations similar to ours, and successful history operating in our industry.” He was evidently referring to the fact that Oaktree participated in 2013 together with Centerbridge Partners in the $350 million refinancing of Billabong International, which recently published vastly improved financial results.
Oaktree still holds a 19.2 percent stake in Billabong, which remains Quik's biggest competitor in the not-so-buoyant surf-inspired apparel market. An executive of Billabong said that its holding will not change after the expected release from a voluntary escrow arrangement of 329,268,294 shares held by affiliates of Oaktree and Centerbridge on Sept. 18.
A non-executive director of Billabong, Matthew Wilson, resigned last week, citing an unexplained conflict of interest with investment policies of Oaktree, which bought out a large part of Quiksilver's debt over the last months while sitting on Billabong's board of directors. A spokesperson for Agnès denied that Oaktree's stake in Billabong would constitute a conflict of interest if the fund obtains control of Quiksilver, declining to discuss future plans at this stage.
Quiksilver's decision to turn to Oaktree came after an investment advisor, Peter J. Salomon, was given a mandate to explore options to increase the company's liquidity. While he had confidentiality agreements with eight potential bidders, Oaktree was presented as the one that knew the company best, having done due diligence already and offering the much-needed DIP financing. With negative cash at the end of July and a big sales decline in the Americas (see the next article), Quik was forced to make a quick move.
As any investment fund, Oaktree may want to cash out at some point from its investment, and it would probably make a big capital gain if it does so with Quik. There is speculation that VF Corporation looked at Quik before but declined to make a bid because of the appalling amount of debt. It may be more interested after more than $500 million in debt is wiped out through the present pre-packaged bankruptcy proceedings.
