PRTY - Party City: Equity Holders To Be Wiped Out In Bankruptcy Sell

Summary

• Ailing party goods retailer to restructure operations and debt obligations in bankruptcy.
• Under the terms of the restructuring support agreement, senior secured noteholders are proposed to become the new owners of the business.
• Existing equity holders will be wiped out.
• With court approval basically a given, investors should sell existing positions and move on, particularly with the stock likely being delisted by the NYSE as soon as next week.

On Tuesday, ailing party goods retailer Party City (PRTY) finally succumbed to ongoing, weak customer demand as well as its unsustainable debt load and filed for chapter 11 bankruptcy protection.

The company entered into a restructuring support agreement with an ad hoc group of creditors representing more than 70% of the company's senior secured first lien notes "to support an expedited restructuring that would substantially reduce PCHI's debt and optimize its capital structure and liquidity" .

The ad hoc group will also provide $150 million in debtor-in-procession ("DIP") financing to support continued operations during the process:

The DIP Facility has a five-month term (subject to extension under certain terms) and customary covenants and terms for a facility of its size. Under the DIP Facility's terms, the committed $150 million will be available in two draws-an $75 million initial term loan available following entry of the interim order and closing, with the remainder available following entry of the final order. Amounts outstanding under the DIP Facility will bear interest at the Secured Overnight Financing Rate plus 10%. The DIP Facility also provides for certain fees, including an upfront commitment premium of 8% and annual undrawn commitment fee of 0.5%. Additionally, as consideration for their agreement to fully backstop the DIP Facility, each member of the Ad Hoc Noteholder Group will receive (a) the opportunity to convert their DIP Facility loans into equity (or equity-linked securities) in connection with any rights offering and chapter 11 plan or (b) if a chapter 11 plan is not consummated, payment of its pro rata share of a cash fee equal to 10% of the outstanding loans under the DIP Facility, in each case, subject to the terms set forth in the Restructuring Support Agreement.

The following table depicts the debtors' prepetition capital structure:

According to the terms of the restructuring support agreement, holders of the company's senior secured Floating and Fixed Rate Notes will become the new owners of the business while creditors of the company's ABL and FILO facilities will be made whole.

Each holder of a Secured Notes Claim shall either receive (i) its pro rata share of the equity of the reorganized Company (the "Reorganized Equity" and of the applicable entity, the "Reorganized Company" to be determined by the Debtors with the consent of the Required Consenting Noteholders), subject to dilution by the Rights Offering, the Management Incentive Plan (as defined herein), and, to the extent applicable, the DIP Equitization or (ii) such other treatment as agreed between the Debtors and the Required Consenting Noteholders.

Consenting noteholders will also be provided the opportunity to participate in a rights offering on terms yet to be determined with the proceeds expected to fund required cash distributions under the plan of reorganization and general corporate purposes of the reorganized company.

Looking at the company's bond prices, even secured creditors are expected to recover only a tiny fraction of the original investment while unsecured noteholders will be holding the bag:

At least they might be provided the opportunity to participate in the proposed rights offering but existing equity holders are going to end up with nothing:

All existing Interests in PCHI shall be cancelled, released, extinguished, and of no further force or effect, and holders of Interests in PCHI will receive no distribution under the Plan.

With more than two thirds of senior secured creditors supporting the plan, court approval is basically a given.

Bottom Line

Not surprisingly, Party City is restructuring its business and debt obligations in bankruptcy with secured creditors proposed to become the new owners of the reorganized company.

According to the terms of the restructuring support agreement, existing equity holders will be wiped out.

With court approval basically a given, investors should sell existing positions and move on particularly with the stock likely being delisted by the NYSE as soon as next week.

For further details see: