Payless Inc.

About

Payless ShoeSource, Inc. operates as a footwear retailer. The company offers shoes, including sandals, boots, sneakers, fling, neutrals, and wide width. It also provides designer and sports shoes. The company offers its products through stores and online. Payless ShoeSource, Inc. was formerly known as Volume Shoe Corporation Inc. and changed its name to Payless ShoeSource, Inc. in January, 1991. The company was founded in 1956 and is based in Topeka, Kansas. Payless ShoeSource, Inc. operates as a subsidiary of Collective Brands Finance, Inc. On February 18, 2019, Payless ShoeSource, Inc. filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Missouri. It is in joint administration with Payless Holdings LLC”.- Bloomberg

Corporate Highlights

4/29/2019:  Certain lenders and unsecured creditors question role of Alden Global Capital in Payless as both majority equity owner following first bankruptcy and senior lender.

2/19/2019: Company files for Chapter 11.

Payless ShoeSource filed for Chapter 11 bankruptcy protection late Monday with plans to close all of its stores in the U.S. and Canada.

The widely anticipated move marks the Topeka, Kansas-based retailer’s second bankruptcy filing in about as many years.

The first time, the company arranged a deal to cut debts accumulated through a private equity deal, close struggling stores and emerge from bankruptcy in 2017 with a chance to survive.

This time, the company is entering bankruptcy with plans to close all of its approximately 2,500 locations in the U.S. and Canada. The company has already ended online sales.

…Payless, which closed about 900 stores during its first bankruptcy, had more than 3,500 remaining in 40 countries and about 18,000 employees as of September.

The company’s bankruptcy petition cited debts and assets of between $500 million and $1 billion.

8/10/2017: Company emerges from Chapter 11 protection.

Discount footwear chain Payless Shoesource emerged from bankruptcy court protection Wednesday after shedding more than $435 million in debt and closing approximately 673 stores.

The emergence, just over four and a half months after the private equity-owned company filed its Chapter 11 petition, gives the chain a cleaned-up balance sheet as it vies to compete in a U.S. retail sector wracked by bankruptcies, store closings and surging e-commerce competition.

The company said CEO Paul Jones plans to retire, handing the company’s leadership to a new executive committee that will search for a permanent successor. The committee, includes chief financial officer Michael Schwindle, chief operating officer Mike Vitelli and board chairman Martin Wade III.

BDC Credit Reporter View

April 29, 2019: We don’t know what’s happening behind the scenes at this Chapter Twenty Two company. Based on the results of the first Chapter 11 – when all senior debt seems to have been repaid in full – we should be optimistic that lightning will strike twice and full recovery will occur. However, this is a much weakened Payless second time round, and liquidation is the likeliest outcome in the U.S. market at least. (Foreign markets may be kept open but we don’t know what value to ascribe thereto). Then there are the very legitimate questions being asked about how Alden Capital 0- the principal shareholder- is also a top of the head secured lender to the Company. Will there be enough assets when the dust settles left to repay all the $21mn in secured debt ? We have some doubts at this stage but will revisit the issue whenever new facts emerge. If TSLX does stumble , it will be a rare reverse for the BDC, which has been able to navigate some very troubled companies without loss. FSK, on the other hand, has been getting into trouble all over the place.

Highlights

IVQ 2018: TSLX and FSK value $20.7mn in debt exposure at slight premium to par.

IQ 2018: TSLX and CCT (now FSK) make new first lien asset based loan with $22mn in advances to Company following exit from bankruptcy.

IIIQ 2017: TSLX indicates that Payless debt- rolled into a DIP loan – repaid in full. In addition, rest of lenders repaid.

“Consistent with our underwriting expectations, our Payless DIP loan was fully repaid during Q3 in connection with the company’s emergence from bankruptcy, resulting in gross unlevered IRR of 24% on our investment”.

5/4/2017: TSLX commented on exposure in Conference Call:

“Payless ShoeSource, filed a voluntary petition for relief under Chapter 11 of the bankruptcy code. As publicly disclosed, the company has entered into a Plan Support Agreement with the majority of pre-petition lenders to significantly reduce debt levels in order to improve liquidity and provide a path to an expedited emergence from bankruptcy. Our asset-based FILO term loan sits within the company’s revolving asset-based loan and has been rolled up into a debtor-in-possession financing. As a part of the ABL DIP facilities, we will receive cash payment in full prior to the company’s exit from bankruptcy.

We underwrote our original investment in Payless with an expectation of a bankruptcy or a restructuring event, but believe our borrowing base-governed loan, secured by the company’s working capital assets provide substantial protection of our principal value. We believe our thesis will be proven out and expect repayment of our loan starting in the second half of 2017 given the milestones in the bankruptcy case. The applicable call protection on our pre-petition loan was earned and recognized upon the company’s bankruptcy filing during the second quarter”.

IQ 2017: Debt goes on non-accrual due to Chapter 11. See Corporate Highlights. BDC exposure: $67mn in senior and junior debt. Principal lender: TSLX with $49mn in senior secured debt.

IIIQ 2015: Debt placed on Watch List due to discounting of second lien. BDC exposure at time: $24mn.

IQ 2014: FS Investment II initiates exposure with $26mn invested in first and second lien debt.