As expected, Tower Records filed for Chapter 11 protection this morning (Feb. 9) in the U.S.
bankrupcty court in Wilmington, Del., with a fast-track plan that calls for the company to emerge within 35 to 60 days.
The plan calls for the $110 million owed to Tower’s bondholders to be converted to an 85% equity stake, which will reduce the debt due them to $30 million. Existing shareholders the Russ Solomon family will retain the remaining 15% in equity, according to a company statement.
Tower’s bondholders and shareholders will be the only impaired classes. A first-day motion was made to ask the judge to rule that the chain be allowed to continue making normal payments to suppliers, according to Michael Bloom, a partner with Morgan, Lewis & Bockius LLP, which is representing the five major music suppliers and six large video vendors. The plan has “overwhelming creditor and shareholder” support, Tower states.
Already, bondholders, holding more than 97% of the debentures, have voted to approve the reorganization plan. In a statement, Tower CEO Allen Rodriguez says the chain’s issues are financial, not operational, and that the move will eliminate the financial risk the chain has faced over the last few years.
For more than two years, Tower has been involved in a restructuring that has seen it shed its international operations, close unprofitable U.S. stores and let go hundreds of employees. In May, it began the debt to equity negotiations, but three bondholders, with debentures worth $2.1 million, had been refusing to agree to the conversion.
Since the Tower bond calls for 100% agreement on any debt-to-equity conversion, the holdouts appeared to be attempting “greenmail,” some sources say. Instead of caving in, Tower chose to turn to bankrupcty court — which requires approval of only 50% of the creditors in the impaired class, with claims totaling two-thirds of the dollar amount due that class — to get legal approval of the conversion.
In addition to improving operations, Tower has been up for sale, in an auction run by L.A.-based Grief & Co. When asked if the chain was still up for sale, Rogriguez says the Chapter 11 filing is “energy-intensive, so we will focus on that process almost totally. At the back end, we will have a new set of owners, who can then make their decision on whether to sell.”
As part of the filing, Tower plans to ask the court to allow it to get free of the leases of two of its existing 93 stores so that it can shut them down, says senior VP of operations Kevin Cassidy. Tower recently closed its Yonkers store and its East Fourth Street/Lafayette, outlet store in Manhattan. The video department will be moved into Tower’s main store there across the street.
CIT Group/Business Credit, which leads a consortium of banks that supply the chain’s revolving credit facility, has agreed to supply Tower with $100 million of debtor-in-possession financing during the reorganization period, and then will also supply a post-petition revolver, which will give the chain better terms and a bigger amount of availability.
The new $30 million in notes to the bondholders have a five-year term. In addition to account payables and what’s owed on its revolver, Tower’s debt also includes a $25 million term loan, which comes due in little over a year to Chase Partners, the previous provider for the chain’s revolving credit facility.
“Today’s action will not only provide the greatest recovery for our bondholders, but it will also create a capital structure that will enable Tower to maintain its premier position in the retail entertainment industry,” Rodriguez says. “We could not have achieved these positive results on a fast-track basis without the extraordinary support of our banks, music and video vendors and employees.”
Cassidy noted that Tower had made “significant operational changes” during its restructuring, which may have been obscured by the company’s debt load. But coming out of the Chapter 11, “we feel very comfortable that we are positioned to play a significant role as a specialty retailer in the music, video and pop culture world,” he adds.
When Tower completes the Chapter 11 process and has a better capitalized situation, “it will give us the opportunity for the things we need to do, not just operational, but to also have a digital strategy moving forward,” says Rodriguez.
The filing itself does not list assets or liabilities except to check the “more than $100 million” box in both instances. In addition to the bondholders, the largest unsecured creditors are listed as Universal Music & Video Distribution, owed $15.6 million; WEA, owed $13.7 million; Sony Music Entertainment, owed $7.1 million; BMG Distribution, owed $7.1 million; and Warner Home Video; owed $2.8 million. However, a source familiar with the filings says most of the totals listed are likely inaccurate.