B. Riley Financial Inc. has proposed an interesting plan to take over Wet Seal Inc., offering to provide the bankrupt teen clothier with a $20 million debtor-in-possession (DIP) loan that would get the business through its restructuring process and, in the end, give B. Riley an 80 percent ownership stake. Wet Seal asked a Delaware bankruptcy court on Jan. 16 to approve the DIP deal.

Wet Seal, which sells inexpensive, trendy women’s clothes, is one of several teen retailers that have faced distress as the retail climate shifts away from mall shopping to e-commerce. Others, including Deb Stores, Delia’s and Body Central, are experiencing similar problems.

The idea behind the loan makes sense: Why bother finding a third-party lender and going through a sale process, when B. Riley could just lend to own? The court granted interim approval on Jan. 20.

Wet Seal’s cash flow problems escalated at the end of the company’s fiscal 2014, as the retailer faced mounting operating losses. During that time, Wet Seal’s vendors required the company to use standby letters of credit, and eventually cash on delivery, according to court papers. Wet Seal was also required to cash collateralize all of the letters of credit issued by its lender, Bank of America NA. To get through its bankruptcy case, Wet Seal wants to use the B. Riley loan, which comes with a plan sponsorship agreement. If that agreement is approved by the court, B. Riley will convert the DIP loan into 80 percent of equity in Wet Seal. The remaining stock would be distributed among other claim holders.

“The buyer’s risk is low, because if the deal doesn’t go through, it will get first dollars out in payment of the DIP,” says Joel Levitin, a bankruptcy lawyer with Cahill Gordon & Reindel. Even if a plan isn’t approved where B. Riley assumes majority control of Wet Seal, providing the DIP means it will be the first creditors paid back from the case.

“A lot of these retail stores are just liquidating. They are in the process of selling off their inventory and closing down everything. So if somebody sees an opportunity for a company to continue as a going concern, it makes sense for that party, who knows the company and wants to buy it, to be the one to take the risk on the financing,” says Levitin. 

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