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Party City Closing Spurred by Sudden Drop in Inventory Value

Shoppers wait for the opening of a Party City store in Richmond, California, U.S., on Wednesday, Sept. 22, 2020. Halloween is a key holiday for Party City, but with Americans wearing different kinds of masks and keeping their distance, its scary season could extend well beyond the end of the October. Photographer: David Paul Morris/Bloomberg (David Paul Morris/Photographer: David Paul Morris/)

(Bloomberg) -- The impending closing of Party City was triggered weeks ago when the retailer was surprised by a sudden — and disputed — drop in the value of its inventory, the company said in court papers.

Lenders used the reduction to demand that Party City, which was struggling with falling sales and declining customer traffic, set aside $50 million, straining the company’s limited pool of cash.

The supplier of costumes and party supplies hired Hilco Valuation Services LLC in September to re-appraise the value of its inventory, a step it took to try to raise additional cash. Lenders owed roughly $162 million under company loans later retained the same Hilco advisers to perform a similar review as part of an annual inventory appraisal.

The trouble surfaced when Hilco’s initial appraisal in November significantly reduced the net liquidation value of key asset categories supporting company borrowings, Party City Chief Restructuring Officer Deborah Rieger-Paganis said in a sworn statement submitted to bankruptcy court on Sunday. In response, Party City lenders required the company set up a $50 million reserve, which further stressed its remaining cash, according to court documents.

Hilco, in a revised appraisal, increased the valuation, but the lenders opted to maintain the $50 million reserve, forcing Party City to raise more cash “under an exceptionally accelerated timeline” to support its business, Rieger-Paganis, said.

A Hilco spokesperson said there were no errors. 

“The appraisal was vetted with the company before it was issued, and all of the company’s questions and issues raised were addressed and reflected in the report,” the spokesperson said.

Party City sought additional investment from a group of bondholders who took over the business following its first Chapter 11 in 2023, but those discussions “did not bear fruit” and the business was also unable to obtain an outside investment, Rieger-Paganis said.

The company was forced to take more drastic action, ceasing new inventory orders and delaying rent and vendor payments in order to preserve cash, according to court documents. By December 10, Party City’s available cash had dipped below the $50 million reserve and it pivoted to preparing a Chapter 11 filing soon after, Rieger-Paganis said.

Lenders “considered it essential to commence store closing sales before the Christmas and New Year’s selling season to maximize the proceeds of such sales for the benefit of all stakeholders,” she said.

Party City’s first bankruptcy hearing is scheduled for Monday morning.

The bankruptcy is Party City Holdco, 24-9062, in US Bankruptcy Court, Southern District of Texas (Houston) 

(Updates with comment from Hilco in the sixth and seventh paragraphs.)

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