JOANN Fabric and Crafts filed for Chapter 11 just after midnight this morning (18 March) with a disclosure statement and plan, backed by a transaction support agreement (TSA), that aims to halve its USD 1bn debt load.

The sewing, crafts, and home décor company does not aim to close any of its 815 stores in Chapter 11. Currently trading publicly on Nasdaq, the proposed plan would take the company private through a debt-for-equity swap with its term loan lenders. JOANN hopes to make its stay in Chapter 11 a quick one, seeking a plan confirmation hearing on or around 25 April.

The company seeks to fund the case with USD 142m in debtor-in-possession (DIP) financing from certain of the prepetition term loan lenders, with the DIP to convert to an exit facility upon plan confirmation. Judge Craig Goldblatt of the US Bankruptcy Court for the District of Delaware has scheduled a first day hearing for Tuesday, 19 March at 1pm ET.

Debtwire Dockets: Joann Fabrics Inc (Access Required)

The company

The company’s roots date to the 1943 founding of Cleveland Fabric Shop, a haberdashery and mercery in Cleveland, Ohio. Over the next two decades, Cleveland Fabric Shop expanded into an 18-store chain. In 1963, the company changed its name to Jo-Ann Fabrics and began expanding rapidly, hitting 500 stores by 1980 and, in the 1990s, acquiring peers Clothworld and House of Fabrics.

Leonard Green & Partners took the company private in 2011 but JOANN would go public again a decade later, with Leonard Green holding onto two-thirds of the common stock. Over the past year, JOANN traded as high as USD 2.15 per share in May 2023 but has steadily decreased in the months since, closing trading on Friday (15 March) at USD 0.23 per share.

Today, the company operates 815 stores in 49 states with 18,210 employees. As of the petition date, 96% of the stores are cash-flow positive. The company’s three main product segments are sewing, arts and crafts and home décor, and “other,” identified as “non-merchandise services.” Sewing made up the near majority of JOANN net sales for the fiscal year ended January 2023 at 46%, according to court documents. The company sources 56% of its products from domestic suppliers, with the rest coming internationally.

Source: First day declaration. Note that the entities highlighted in green are not debtors in the Chapter 11 case.

The debt

JOANN enters Chapter 11 with USD 1.06bn in funded debt. The first chunk of that debt stems from a 2016 credit agreement for an asset-based loan (ABL) and first in, last out (FILO) loan, with USD 286.4m and USD 115.7m outstanding, respectively, on that facility.

At the same time, the company entered a term loan agreement, with USD 658.1m currently outstanding. Bank of America is the administrative and collateral agent on both credit agreements.

In addition to its funded debt, JOANN owes USD 218.5m in merchandise trade debt to general unsecured creditors.

The descent

At the onset of the COVID-19 pandemic and subsequent stay-at-home mandates, JOANN saw a 23.5% spike in sales for FY21 from FY20 amid growing customer interest in do-it-yourself projects and indoor hobbies, along with nationwide need for reusable face masks, Chief Financial Officer Scott Sekella said in his first day declaration. In the wake of that boost, the company went public in March 2021 and raised USD 76.9m in an initial public offering.

Still, “traditional retailers” like JOANN have faced a “challenging commercial environment” amid increased competition from online sellers and the continued shift away from brick-and-mortar retail shopping, Sekella said. In 2018 and 2019, the cost of merchandise “rose sharply” as the federal government instituted high tariffs on Chinese imports while JOANN was already taking on “significant capital expenditures” to remodel its stores, according to the declaration. By the second half of 2021, margins began to tighten as pandemic restrictions eased and hobbyists “spent less time crafting indoors.”

Amid increasing concerns over liquidity, JOANN implemented a program to cut expenses, ultimately cutting ocean freight costs by USD 102m, domestic freight by USD 8m, engaging new suppliers and renegotiating with incumbent vendors to save USD 60m on supplies annually. In October 2023, JOANN hired Gordon Brothers Holding II LLC to assist on renegotiating leases, and in January 2024 the company brought on Young Conaway Stargatt & Taylor to evaluate the pool of claims the company would face in a hypothetical Chapter 11 and to shape releases to be granted under a Chapter 11 plan to ensure they were appropriate “in scope and nature.”

From mid-2023 forward, JOANN worked with Alvarez & Marsal, Latham & Watkins, and Houlihan Lokey to explore strategic alternatives. The company ultimately entered into the TSA with an ad hoc lender group holding more than 80% of the term loans, represented by legal counsel Gibson Dunn & Crutcher and financial advisor Lazard, along with two-thirds of the common equity holders. Though the disclosure statement does not indicate the identities of those equity holders, Leonard Green is separately noted to hold two-thirds of JOANN’s equity.

The ABL and FILO lenders are not formally signed on to the TSA but have agreed to have their debt either paid in full or refinanced into an exit facility. As the proposed plan contemplates that exact treatment for the lenders, the TSA effectively has the support of the ABL and FILOs. With the TSA lined up, JOANN filed for Chapter 11 this morning.

The DIP and the TSA

JOANN aims to fund the Chapter 11 case with USD 142m in DIP financing, funded by certain of the term loan lenders. The facility provides USD 107m in new money, with the rest of the financing coming in the form of USD 25m in rolled up unsecured debt. The DIP would convert into an exit facility upon confirmation of the plan.

               Source: DIP motion

Under the plan, the ABL and FILO lenders will either have their claims paid in full or refinanced as part of an exit package.

The term loan lenders would see a 1.1% recovery on their claims through a debt-for-equity swap, though term loan lenders that participate in the DIP will be eligible for backstopping and other fees.

General unsecured creditors would be paid in full in the ordinary course of business and are unimpaired.

The DIP and TSA set a series of milestones for the case, requiring JOANN to secure plan confirmation by 7 May.

The advisors