THE BEAUTY OF BELK.

• Author: Rasmussen, Robert K.

"The sky is falling." "We are at the end of times." "What rough beast, its hour comes round at last, slouches towards Bethlehem to be born?" To these iconic apocalyptic quotes, Professor Lynn LoPucki wants to add "Chapter 11's Descent into Lawlessness." (1) According to Professor LoPucki, we are approaching the end of times, at least when it comes to the corporate reorganizations of large companies. Chapter 11 no longer has any meaningful rules. Rather, the powerful can hire influential law firms which file cases in preferred venues, and then use the process to extract whatever value they want from the helpless. We are in a world where courts seeking to attract large corporate filings "flagrantly violate the law" or otherwise "offer ... freedom from the law." (2) This is, and is intended to be, a shocking indictment. Over a decade ago, Professor LoPucki labeled the then-current system of bankruptcy venue as "corrupt." (3) That description now seems almost quaint. In the intervening years, Professor LoPucki asserts that the system has deteriorated even further- it is no longer bad law, it is simply not law. (4)

As the prime piece of evidence for his scathing account, Professor LoPucki trains his sights on the recent Chapter 11 case of Belk, Inc. ("Belk"), a large chain of department stores in the Southeast. (5) Belk certainly caught everyone's attention when it filed for bankruptcy on February 23, 2021, and emerged with a confirmed plan of reorganization 16 hours later. All agree that the time between filing and emergence was unprecedented. (6) Years ago, it was not uncommon for cases to last more than 16 months prior to plan confirmation. (7) Sixteen hours is breathtaking.

Standing alone, however, speed is not an indictment of the system. We take issue with Professor LoPucki's description of Belk and its restructuring. Rather than a case that illustrates the defects and lawlessness of the current system, a proper understanding of Belk highlights the best of the bankruptcy system. Advanced planning among all affected parties led to an outcome that should be applauded. The institutional creditors holding Belk's funded debt and the owners of Belk's equity reached a deal that injected new funds into the business to buy needed inventory, reduced the funded debt obligations by over 10 percent and extended the maturity of its remaining debt. (8) The transaction, in the modern parlance, created additional runway for the business to try to reverse its fortunes in a difficult retail environment. All trade creditors were paid in cash and in full. All of Belk's 17,000 employees retained their jobs without any reduction in their pay. Far from being lawless, Belk's restructuring complied with all applicable provisions of the Bankruptcy Code. Belk's bankruptcy case ensured that the transaction was completed in a quick and efficient manner that captured the parties' intent. The bankruptcy court, far from rubber stamping what was put in front of it, created a novel order to ensure that parties that were not part of the deal had their rights preserved. Rather than a cause for concern, Belk is a case for celebration.

1. Belk and the 2015 LBO

   To understand Belk's restructuring, one needs to understand the events leading up to the bankruptcy case. (9) Belk is not a company that woke up one morning, found itself in financial distress and went running immediately to the bankruptcy court hoping to sort out its troubles in that forum. In other words, its Chapter 11 case was not a freefall bankruptcy; it was an extensively planned restructuring involving all major affected stakeholders.

   Belk experienced financial distress for some time prior to its Chapter 11 case. This distress stemmed from the combination of two factors. The first, detailed in this part, was a leveraged buyout in 2015 that, like all leveraged buyouts, increased the company's leverage and hence its risk of financial distress. (10) The second, detailed in part II, was the pressure that all brick-and-mortar retailers suffered prior to and then during the COVID pandemic. (11) The extreme stress in the retail sector is not particular to Belk and continues to this day. (12) Belk's restructuring provided liquidity, reduced its overall debt and reduced the interest that had to be paid; it gave Belk a runway to address operational challenges. It did not (and could not) guarantee success.

   1. The History of Belk and its Corporate Structure

      Belk was (and still is) the largest privately owned chain of department stores in the United States. It traces its roots to North Carolina. (13) As more fully discussed herein, from the late 1880s through late 2015, it was a family-owned business. As Belk grew into a chain of roughly 300 stores, it spread across the Southeast. The growth was fueled by both opening new stores and acquiring competitors.

      From its inception, Belk remained closely held by the Belk family. In terms of its equity ownership, the company had a dual class stock structure. (14) Class A shares could be converted at any time to Class B shares on a one-to-one basis, and the only difference between the classes of shares was that Class A had ten votes per share and Class B had one vote per share. (15) Over the years, some shares (both Class A and Class B) had been sold to people outside of the family, and some Class B shares had been issued as part of incentive compensation plans to various employees at the company. Still, by the middle of the 2010s, the number of Class A shares issued (over 38 million) was vastly greater than the amount Class B shares issued (less than 2 million). A little less than half of the Class B shares (less than 1 million) had been issued pursuant to executive compensation plans over the years. Thus, even without the preferred voting rights accompanying the Class A shares, the Class A shareholders held the vast share of the franchise when it came to shareholder voting.

      At the same time, the Belk family owned well over 60 percent of outstanding shares in both Class A and Class B, putting them firmly in control of the company. No major proposal that required shareholder approval could gain traction without the blessing of the family. The shares outside the family traded infrequently and were not listed on any major stock exchange. At the time of its leveraged buyout in 2015, Belk had about 850 shareholders, including members of the Belk family.

      At the start of 2014, Tim Belk was Chair of the Board of Directors (the "Board") and Chief Executive Officer of the company. He was the latest in an unbroken line of Belk family members who ran the company since its founding. Belk had always been headed by a Belk. Tim's brother, Johnny Belk, was the Chief Operating Officer. Like Tim, Johnny served on the Board. A third family member also served on the nine-person Board. (16)

   2. The Buyout

      Beginning in the latter half of 2014, Belk's senior management approached the Board, advising that the Board should explore strategic alternatives for the future of the company. The Board agreed with management's recommendation and Belk hired the investment firm Goldman Sachs ("Goldman") in January 2015 to explore what options existed. In making this decision, the Board stated that it had an obligation to maximize the value of Belk to its shareholders. The shares of Belk were thinly traded, leaving shareholders with limited ways to turn their shares into cash. (17) A sale would have the effect of monetizing the shares, both for the Belk family and the outside equity holders.

      In late 2014 through early 2015 Goldman shopped Belk to at least seven potential buyers and in July 2015, Sycamore Partners ("Sycamore") made an offer of $65.50 a share. At the time, Sycamore had more than $3.5 billion in capital under management and had already acquired a number of clothing retailers via leveraged buyouts (i.e., Aeropostale, Coldwater Creek, Dollar Express, Hot Topic, Nine West and Talbots). Unlike some of Sycamore's other transactions, however, Belk was not a turnaround project, it was a healthy company still seeking to expand its operations. Belk was not a distressed company seeking a white knight, it was closely held company where the family had decided to seek a financial exit.

      After further negotiations between the Board and Sycamore, the latter's offer for the company was raised to $68 a share, resulting in a proposed purchase price of just shy of $3 billion. The Board formally accepted the offer on August 23, 2015. Under the terms of the sale, Tim Belk was to stay on as CEO, but Johnny Belk announced that he would soon be leaving Belk to "pursue other interests." (18) The new Chief Operating Officer, who eventually became CEO of Belk in September 2022, had been in the senior leadership team at three other retailers that were owned by Sycamore. (19)

      When the buyout was announced analysts praised the reasonableness of the sale price. (20) The sale price was 6.67 times earnings before interest, taxes, depreciation and amortization ("EBITDA"). The higher the multiple of EBITDA, the more aggressive the price. Many transactions in the 2014 to 2017 had higher multiples. For example, in 2017, one-third of buyout loans had a leverage ratio of over 7.0, a ratio higher than that of Belk's takeover. (21) Similarly, in 2014, the year before the Belk deal, the percentage of deals with a 7.0 multiple or higher was 40 percent. (22) Thus, the leverage ratio for the acquisition of Belk was roughly in the middle of the distribution of deals completed around 2015. It does not appear, even with the benefit of hindsight, that this was an aggressive overreach in terms of the pricing of the deal.

      The structure of the deal also was not overly aggressive. As in common with private equity transactions, the funds generated to pay the departing shareholders came from newly borrowed funds and an equity investment by the private equity sponsor. There were four basic parts to the financing of the...