When Tower Records heads into a Delaware bankruptcy court within the next week, the first motions it files are expected to be one that will convert bondholders into majority owners of the chain and one asking the court to rule for an unimpairment of trade debt.
Tower management is moving forward on a pre-packaged Chapter 11 filing, since most large creditors agree with the reorganization plans. The filing is necessary to complete a restructuring begun two years ago and is needed to force a debt-to-equity conversion, which would strengthen the chain’s balance sheet.
Sources say bondholders controlling 3% of the $110 million in Tower debentures are opposing the conversion, and the bonds’ covenants call for 100% agreement. However, provisions in the bankruptcy code allow for such a conversion to occur if more than half the bondholders — who control at least two-thirds of the bonds, or about $74 million — vote in favor of it.
To ensure that Tower retains its value and remains a viable option going forward, the second motion in the bankruptcy court will ask that the company be allowed to pay all trade debt in full.
In most Chapter 11 filings, retailers move to take care of their major suppliers, and it is usually the small, independent music and video labels that get hurt. But those labels are seen as critical to the Tower strategy of being a deep-selection superstore. This is why the chain’s management, with the backing of the majors, is including all vendors in the motion.
If the judge approves the latter order, Tower can continue to make normal payment terms to suppliers. In fact, during the entire restructuring process, Tower has never missed or short-changed the major vendors on payment, and in return has always been on normal credit terms with them, sources say. Tower has also been consistently current in payments to most independents, although a few stopped selling to the chain a few years back when Tower demanded more lenient terms than the traditional 60 days to pay for product.
As more than one source points out, anything could happen in court, from the judge siding with the recalcitrant bondholders and demanding other creditors also take hits on what they are owed, to a suitor showing up to buy the chain.
But if the court approves of the plan, sources suggest, it will give the bondholders 85%-90% ownership in Tower, leaving the rest to the family trust of chairman emeritus Russ Solomon, who is expected to remain with the company. Sources familiar with the proceedings tell Billboard.biz that press reports stating that the banks will have a portion of the equity are incorrect.
In fact, the process is expected to result in post-Chapter 11 financing from the existing bank CIT Group/Business Credit on terms more favorable to Tower, since its balance sheet will be stronger. While Tower and its investment bank, Los Angeles-based Grief & Co., continue to have discussions with suitors, sources say the auction process begun last summer has yet to produce a bid that satisfies all parties.
So far, the process has flushed out at least five bidders, sources say. These include Hicks, Muse, Tate & Furst, a well-known investment firm; the Yucaipa Cos., which owns Alliance Entertainment Corp.; Sun Capital Partners, which owns the Musicland Group; and Pamlico & Co., formed by former music and video executives Ralph King and Devandra Mishra to acquire Tower.
After three rounds of bidding, the offers that had higher equity components did not include enough money, and the larger offers carried too much debt and other onerous requirements, sources say.
While it is possible that one bidder may put together an offer that would win approval, sources say bondholders are planning to retain ownership after Tower emerges from Chapter 11. They are betting that management can continue to improve operations, which would provide bondholders with the chance to achieve a more lucrative exit strategy down the line.
Still another source familiar with the proceedings suggests that one of the suitors may eventually try to buy a controlling interest in Tower from the bondholders. That way, the bondholders could reduce risk and enjoy some cash on the front end, but still have an ownership stake that would be rewarded on the back end, if the chain continues to improve its performance.
Sources at the majors hail the current Tower team of president Allen Rodriguez and CFO Dee Searson, saying they have done a great job of continuing the turnaround begun by the former management. Those sources also say they are pleased that Tower founder Solomon will stay on, because he still has the company’s “vision.”
Tower representatives had no comment.
