Quiksilver Inc. filed a Chapter 11 bankruptcy petition September 8 after securing a financing package from the same private equity firm that helped rescue — and remains one of the two largest shareholders of — its global rival Billabong International Ltd.

The filing in the United States Bankruptcy Court for the District of Delaware commenced voluntary proceedings for relief under Chapter 11 of the United States Bankruptcy Code for 11 U.S. subsidiaries and will facilitate a  financial and operational restructuring that will result in affiliates of Billabong shareholder Oaktree Capital Management L.P. becoming Quiksilver’s controlling shareholder when it exits bankruptcy court.

The pre-packaged bankruptcy plan was  supported by investors holding 73 percent of Quiksilver’s most senior class of debt, including enough holders of the company’s Eurobonds to waive any technical default arising from the filling. Unsecured creditors, however, stand to lose tens of millions of dollars.

In other news, retailers Pacific Sunwear of California Inc and Zumiez Inc. reported unexpected and sharp declines in their total net sales and same-store sales for the quarter ended Aug. 1 and said they expected the declines to accelerate in the third quarter.

Quiksilver said it will continue to operate in the ordinary course of business as a “debtor-in-possession” (DIP) under the jurisdiction of the Bankruptcy Court. On Thursday, the court approved several customary motions that granted Quiksilver access to $115 million of a $175 million DIP financing provided by affiliates of Oaktree and Bank of America that will enable Quiksilver to pay employees, landlords, vendors and other creditors needed to continue operations.

Quiksilver anticipates the DIP financing, in conjunction with other existing sources of liquidity, will be more than sufficient to fund its ongoing operations in the U.S. and abroad.

Under the DIP agreement, Oaktree will provide a comprehensive blueprint and all the funding Quiksilver needs to emerge from Chapter 11 as a going concern. Under a Plan Sponsorship Agreement (PSA) submitted to the court, Oaktree would  convert its substantial debt holdings Quiksilver  into a majority of the stock in the reorganized company. Quiksilver investors and creditor will get their first chance to object to the PSA an Oct. 6 at hearing scheduled by the court Thursday.

Oaktree's second act

Oaktree is now wrapping up a turnaround at Quiksilver rival Billabong.

Oaktree acquired a 19.2 percent stake in Billabong in September 2013 after it and another private equity firm persuaded the Australian action sports company's board to abandon a rescue package it had negotiated just two weeks earlier. The two firms won over the board in large part because their plan included a $135 million equity investment that reduced Billabong's debt burden.

Billabong reported its first full-year profit in four years August 27 following a loss of AUS$233.7 million in the fiscal year ended June 30, 2014. On Monday, Oaktree Managing Director Matthew Wilson resigned from Billabong's board of directors citing potential conflicts of interest. As of Thursday, Oaktree's stake in Billabong was worth about $110 million. Wilson leads Oaktree's retail and consumer investing efforts.

“Mr. Wilson and Oaktree are strong supporters of Billabong’s turnaround strategy, which the Board and the Group remain focused on implementing,” Billabong Chairman Dr. Ian Pollard said September 8.

Oaktree manages more than $100 billion in assets and has a track record of assisting companies through the restructuring process. In 2013, for instance, it played a key role recruiting former Eddie Bauer CEO Neil Fiske to take the CEO role at Quiksilver.

With the protections afforded by the Bankruptcy Code and the financing provided by Oaktree, Quiksilver will be able to satisfy its ongoing obligations to customers, vendors and employees and have the flexibility needed to complete the turnaround of the company's U.S. operations, according to Quiksilver CEO Pierre Agnes.

“Our fresh capital structure, with a very low level of debt for our industry, will enable us to invest in and reinvigorate our brands and products,” said Agnes. “We are confident we will emerge a stronger business, better positioned to grow and prosper into the future.”

Quiksilver's 2.5 debt-to-asset ratio

Quiksilver's unsecured creditors will not fare so well. The petition estimates that as of July 31, Quiksilver Inc. and the affiliates covered by the filing had total assets of $337.0 million and total debts of $826.0 million, including $279.0 million in senior secured notes and $441.9 million in senior unsecured notes. About $105 million in unsecured debt is owed to trade creditors.

The largest unsecured creditor is listed as U.S. Bank National Association, which holds $225.5 million in senior unsecured notes. The next six largest unsecured creditors are trade creditors based in South Korea, the People's Republic of China, Taiwan and Hong Kong.  The balance of the top 30 unsecured creditors consists of more offshore suppliers, landlords, law firms and former executives. 

Quiksilver co-founder and Chairman Bill McKnight, who retired as the company's executive chairman October 31, 2014, is owed $1 million in severance pay, while former chairman and CEO Andrew Mooney, who was fired in April, is owed $1.2 million in severance pay.

Store closings to continue

While Quiksilver intends to continue closing stores in the Americas it anticipates the Bankruptcy Court will consider its request for “first day” relief promptly. The requested relief includes requests for the authority to make wage and salary payments, continue various benefits for employees, and honor certain customer programs, such as gift cards and returns on merchandise purchased prior to the bankruptcy filing.

Skadden, Arps, Slate, Meagher & Flom LLP is serving as the company's legal advisor, FTI Consulting, Inc. as its restructuring advisor, and Peter J. Solomon company as its investment banker.

“Oaktree’s financial strength and expertise, deep experience working with companies in situations similar to ours, and successful history operating in our industry make them an exceptional partner for us going forward,” Quiksilver said in a statement announcing its Chapter 11 filing. “We value our wholesale customers as well as our vendors and suppliers and appreciate their support through this process. In addition, we thank our passionate and dedicated employees and athletes who remain our greatest assets. Quiksilver is, and as a result of this process will continue to be, an iconic leader in the action sports market.”