This story has been updated to include additional information.
The bankruptcy sale of Tully’s Coffee overflowed with drama. The Pacific Northwest coffee chain would have been sold to Starbuck’s if Green Mountain Coffee Roasters, another big name in java, hadn’t refused to affirm the purchase. Eight bidders vied to buy the company in a one-day sale that produced a price double the initial “stalking horse” bid. Last but not least, it was Patrick Dempsey, the “Grey’s Anatomy” star who plays a neurosurgeon nicknamed “McDreamy,” who eventually won the auction.
But it was what went on behind the curtain that really saved Tully’s. In particular, a nontraditional debtor-in-possession (DIP) loan allowed the company to continue to operate its stores temporarily until the auction as well a cash infusion from Dempsey’s group prior to the transaction’s close that allowed the loan to be repaid.
By the time the 20-year-old coffee chain declared bankruptcy in October 2012, it had little choice but to try to file Chapter 11 and arrange a 363 sale, in which, instead of submitting a reorganization plan, the petitioner arranges to auction the assets to a buyer in an expedited process.
The company had never generated positive cash flow, according to the Rob Carringer of the Deloitte Corporate Restructuring Group, which advised Tully’s. It had a host of poorly performing stores that needed to be closed, and relatively high coffee prices at the time (over $1.80 per pound) were depleting what little excess cash the business had.
And the company had been selling off pieces of itself over the years just to keep its head above water. Tully’s operating company, TC Global, had sold the roasting plant, the Tully’s brand name and its wholesale business to Green Mountain Coffee Roasters for $40.3 million in 2009. (GMCR then licensed the Tully’s name back to TC Global.) In 2006, TC Global had also disposed of the rights to operate Tully stores in Japan.
Being “asset-lite,” though, presents a problem in bankruptcy. Debtors usually need to arrange DIP financing to get working capital to (1) keep a company running and (2) restore vendor and customer confidence in the ability of the company to maintain liquidity. Often, DIP financing is secured by some of the company’s assets. In Tully’s case, it had very little to borrow against. The coffee shop business is not asset-intensive anyway. “Maybe you have a coffee machine and a couple of refrigerators,” says Carringer.