Party City prepares to exit Chapter 11 with $1B reduction in debt

Listen to this article

Woodcliff Lake-based Party City Holdco Inc. is preparing to exit Chapter 11 with a reduced store footprint, strengthened capital structure and improved liquidity.

As part of a plan approved Sept. 6 by the U.S. Bankruptcy Court for the Southern District of Texas, the party goods retailer’s debt will be reduced by nearly $1 billion and its equity value will be turned over to lenders who helped support the restructuring.

In a statement, Party City said the reorganization will enable the company to “move forward with a more profitable … store footprint, consisting of nearly 800 locations nationwide, after negotiating improved lease terms and exiting less productive locations” during the Chapter 11 process.

When the retailer filed for voluntary bankruptcy in January, it had around 820 stores, owning 770 of them. It also had just over 50 franchise locations in the U.S., Mexico and Puerto Rico.

In commenting on the court approval, the company’s chief executive officer, Brad Weston, said, “With our debt substantially reduced and Party City store portfolio optimized, we will emerge better positioned to advance our strategic priorities, continue to innovate and elevate the consumer experience, and pursue new growth opportunities.”

“We thank our team members, retail and wholesale customers, suppliers, and landlords for their support and collaboration during this process, and we are excited to build on PCHI’s proud history as the leader in the celebrations space,” Weston said.

The approved reorganization plan also calls for a new exit-based loan of $562 million and a backstopped $75 million new money investment to fund distributions and payment of administrative claims as well as the company’s operations once it emerges.

Party City will also have new shareholders, including the members of an ad hoc group of holders of the company’s senior secured first lien notes who supported the restructuring.

Set up for success

Prior to signing off on the deal during a federal court hearing in Houston, U.S. Bankruptcy Judge David Jones reportedly acknowledged the unfavorable outcome for individual stakeholders whose shares will not be wiped out, saying, “The math is what the math is. It’s one of those things where there simply is not an alternative.”

With $1.4 billion in pre-bankruptcy debt, Party City would be unable to repay it and have money left for shareholders, according to Jones.

“This plan sets the company up for success going forward. And most important, your honor, this is a plan that preserves thousands of jobs,” Ken Ziman, an attorney for the company, said during proceedings. 

Founded 36 years ago in East Hanover, Party City is the largest retailer of party goods in the U.S., Canada and Mexico and operates under the Party City, Halloween City, Toy City and Party Outlet brands.

In recent years, the company has struggled to keep pace with changing consumer behavior, particularly amid the growth of e-commerce and big box retailers. Since 2019, it has been working on large-scale changes, such as restructuring its debt and closing dozens of stores.

As part of the Chapter 11 process, Party City entered into a restructuring agreement with a bondholder group to reduce its $1.67 billion debt load. It also secured $150 million in debtor-in-possession financing to support operations, as well as court approval to keep its stores open.

In recent months, the business has faced several challenges, but an attorney for the official creditor’s committee told Bloomberg that Party City “has been able to overcome … the trials and tribulations.”

Party City revealed in a June filing with the U.S. Securities and Exchange Commission (SEC) that its longtime auditor, Ernst & Young LLP, resigned due to a disagreement over the retailer’s decision to not include a going concern warning in its third quarter 2022 report. A few weeks later, the SEC asked Party City to retain documents and data in connection with an “ongoing investigation” by the regulator.

It is also facing a class action lawsuit for allegedly misleading shareholders regarding the company’s financial health ahead of filing for bankruptcy protection.

Of the numerous retailers who have sought Chapter 11 relief this year, Party City is among the few to emerge intact and with plans to continue operations.

Chains including Union-based Bed Bath & Beyond were forced to shut down its namesake stores, as well as its Buybuy Baby and Harmon Face Values banners. Following Bed Bath & Beyond’s demise, its intellectual property rights were acquired by Overstock.com, which has since relaunched the brand’s website, while Dream On Me, a baby goods retailer in Piscataway, scooped up BuyBuy Baby’s digital assets.