Hancock Fabrics obtains court approval for plan of reorganization

By Jennifer Lanning Drey

Portland, Ore., July 22 - Hancock Fabrics, Inc. was granted court approval for its joint plan of reorganization Tuesday by the U.S. Bankruptcy Court for the District of Delaware, according to a court filing.

As previously reported, Hancock Fabrics is offering rights to buy up to $20 million of floating-rate secured notes and warrants to buy up to 9.5 million shares of common stock to existing holders of at least 970 shares of Hancock common stock.

Hancock stockholders Sopris Capital Partners, LP, Berg & Berg Enterprises, LLC and Trellus Management have agreed to backstop the notes offering if the stockholders do not subscribe for 100% of the notes.

The backstop parties will buy any notes not subscribed under the offering at a price of $100 per note.

In exchange, Hancock has agreed to issue the backstop parties warrants to purchase 1.5 million shares of common stock.

Stockholders will receive one right to purchase a note in the principal amount of $100 and receive a warrant to purchase 40 shares of common stock.

The purchase price on the five-year non-convertible notes, which will accrue interest at Libor plus 450 basis points, will be $100.

Interest for the first four quarters can be paid by the issuance of additional notes. If Hancock elects to issue additional notes, the interest for the period will be Libor plus 550 bps.

The five-year warrants will entitle the holder to purchase 400 shares of common stock per each $1,000 of notes purchased and will be exercisable at a price per share equal to the greater of $1.00 and the volume weighted average trading price for 30 days before the third business day before issuance.

The warrants will be exercisable on the issuance date.

The notes can be redeemed any time after issuance. The redemption price within one year of issuance will be 102, the redemption price within the second year after issuance will be 101 and the notes will be redeemed after that at par.

The noteholders have the right to force a redemption at a price of 101 upon a change of control of the company.

Plan creditor treatment

Treatment of creditors will include:

• Holders of administrative claims, priority non-tax claims, general unsecured claims and priority tax claims will recover 100% in cash;

• Holders of secured claims will recover 100% either in cash or reinstatement of their claims; and

• Holders of intercompany claims, stock interests in Hancock Fabrics and stock interests in its subsidiary debtors will recover 100% through reinstatement of their claims or interests.

Exit financing

In addition, Hancock was granted court approval for a new $100 million 60-month exit financing revolving credit facility in April.

GE Capital is the lead bank on the deal.

Interest on the exit loan is expected to be Libor plus 225 bps. Starting on Jan. 1, 2009, pricing on the revolver can range from Libor plus 162.5 bps to 237.5 bps, based on excess availability.

If the company terminates the revolver during the first year, a prepayment premium of 1% of the maximum amount will be required, and if it is terminated during the second year, the prepayment premium will be 0.50%.

Proceeds will be used to refinance the company's existing working capital debt upon its emergence from Chapter 11 and for working capital.

Hancock Fabrics, a Baldwyn, Miss., specialty retailer of fabric and related home sewing and decorating accessories, filed for bankruptcy on March 21, 2007. Its Chapter 11 case number is 07-10353.

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