Fossil Group and the new ‘Stapled-Exchange’ LME

Welcome to the 205th Pari Passu newsletter.

This week, we are covering one of the most innovative restructuring transactions in recent years, the ‘Stapled-Exchange’ LME. It combines lots of US and UK law to pull off a maneuver that has begun a trend of US-listed companies making their way to London to use English restructuring processes to achieve outcomes that would not be possible in the US. Therefore, this new kind of LME is important to understand for professionals on either side of the Atlantic. This also marks the beginning of a three-part series which will follow up this part with the highly requested coverage of New Fortress Energy (NFE) and Primer on Cross-Border Restructuring in the LME Context.  

Today, we begin with Fossil Group, which once commanded an $8.6bn market capitalization in 2012 and recently, only narrowly avoided having to file for a US Bankruptcy Process by a few hours. We will cover Fossil’s business as a mid-range watchmaking, licensing, and distribution platform, and explain how it collapsed due to a combination of structural shifts in consumer behaviour, tight covenants that forced almost a decade of cost-cutting, and just $150mm of “baby bonds” that sent the global watchmaking powerhouse into disarray. Then, we lay out how unique the company’s problems were, such that no solutions in the US alone could address them. Finally, we bring you our unique five-stage breakdown of the Fossil Stapled-Exchange transaction, which involved a registered public exchange offer and rights offering, ‘stapled’ to an English Part 26A Restructuring Plan that swept up non-participants; then we set up some issues for us to revisit in a future post. Let’s dive in!

As a note to our paid subscribers, we continue to expand our research team by adding legal analysts who are instrumental in covering situations involving significant legal complexity, such as today’s writeup. If there are any topics you would like us to explore, please do not hesitate to reach out.

Functionally, the wristwatch is almost obsolete. Almost any device with a screen is more reliable at telling the time than mere mechanical movements. Yet, we don’t need to tell you people still buy watches. Today, watches are considered another piece of jewellery we wear. Watches have evolved from telling us the time to telling us something about the person wearing it. 

Fossil Group (Fossil) is involved in the business of watches. However, Fossil is unlike luxurious Swiss brands that come to mind (Audemars Piguet, Patek Philippe, etc.), nor is it a budget-friendly watchmaker. Fossil sits in the mid-market range as a watch brand, pricing its own watches typically between $70 and $500 [5] [15]. However, what distinguishes Fossil is that it is a design, sourcing, and distribution platform for other fashion houses. So, think of Michael Kors, Emporio Armani, and Tory Burch; these fashion houses license their IP to Fossil, take a Royalty on every unit that Fossil sells, while keeping approval rights over the design.

The incentive for these fashion houses to agree to such an arrangement instead of making their own watches is that their know-how is completely different. Watches require movements, crystals, case tooling, component supply chains, water-resistance testing, battery and warranty infrastructure, and a specialised physical distribution network, which is far different from what is typically required for selling clothing and fashion accessories [5] [16]. It would not be cost-efficient to build this infrastructure from the ground up. Thus, licensing their brand name to a trusted watchmaker allows them to monetise their brand in a segment that is otherwise very costly to enter. Fossil, in exchange, gets access to brand names with global recognition it could never build itself, at price points its own proprietary labels could not command [5]. 

It is worth noting, however, that while the royalties Fossil pays are a ‘Cost of Sales’ (COGS), they do not fall in line with volume of sales. Most of Fossil's licence agreements carry minimum annual commitments payable regardless of how much product sells [15]. Thus, COGS can be ‘sticky’ even when sales are weakest.

Fossil’s platform is truly global. Watch sourcing is coordinated through Fossil (East) Limited, its Hong Kong subsidiary, and a substantial share of global watch production runs through Asian factories the company wholly or majority owns (47% in FY2019, the year the company disclosed it) [8] [9]. Finished goods move through three regional warehouses: Dallas for the Americas, Eggstätt, Germany for Europe, and Hong Kong for Asia. From there, the product reaches roughly 132 countries through 21 company-owned sales subsidiaries and 74 independent distributors [15]. This is primarily why Fossil has been able to amass such an impressive portfolio of brands: its vertical integration combined with its global platform gave a lower unit cost structure, allowing it to secure multi-year licensing deals. Further, as a distributor, Fossil’s revenues are also geographically diversified: 50% of revenues were generated in the Americas, with 34% in Europe and a further 16% in Asia [4].

At Fossil’s peak in 2014, watches accounted for 78% of sales, of which ~57% were licensed brands [4]. The company also had segments in Leathers (such as handbags and belts) and Jewellery, which helped capture an additional share of consumer fashion spend. Both segments each made up 12% and 8% of sales, respectively. Through 2025, this profile remains roughly consistent. Overall, Watches, both proprietary and licensed brands, drive Fossil’s revenue.

Before we begin, an aspect of Fossil’s corporate history is important for us.  Fossil was incorporated in 1984 as a Texas corporation before subsequently being reorganised and incorporated in Delaware in 1991 as Fossil, Inc [15]. In 1993, Fossil completed its IPO on the NASDAQ with the ticker FOSL. Key for later is that in 1994, Fossil Inc. (later becoming Fossil Group, Inc.) was the listed Holding Company [15]. 

Fossil’s case is unusual in one respect compared to our recent writeups: the company was never seriously overleveraged. Total debt peaked in 2016 at $802mm and fell to $168mm by 2024 [6] [14]. However, Fossil would suffer a dramatic collapse in earnings, which forced it to undergo multiple refinancings. Each refinancing came with stricter covenants than the last, which eventually, combined with its infamous and inflexible “baby bonds” it issued in 2021, forced Fossil into a complex restructuring transaction in 2025.

At its peak in 2014, Fossil had $3.5bn of revenue and $662mm of EBITDA at a 19% margin, a total debt leverage ratio of 0.9x with $937mm in total liquidity [4]. Its market capitalization that year was $5.7bn as well, implying an EBITDA multiple of ~9.1x [18]. 

However, in September 2014, the watch industry was permanently changed when Apple unveiled the Apple Watch and began shipping it in April 2015, with other companies like Samsung and Fitbit following [5] [27]. The implications of this should not be understated. Much of the demographic that would previously have bought from Fossil or its licensed brands, particularly the female fashion-watch customer, was moving to smartwatches [26]. Alongside traditional competitors emerging in the brand-licensing to watch-making and distributing space such as Seiko and Movado, we could describe Fossil, literally, between a rock and a hard place [5].

Fossil responded by acquiring the wearables business Misfit in December 2015 for $214mm in cash to begin developing smartwatches [5]. However, going with the grain proved to be the wrong move. Smartwatches carried structurally lower gross margins because of component cost and higher warranty expense, and Fossil could never match the R&D and supply-chain scale of the technology companies, constrained by economies of scale. This was compounded by an existing maintenance covenant that had a 2.5x total leverage ceiling that would force domestic subsidiaries to guarantee the existing debt and a pledge of 65% of the voting stock of important foreign subsidiaries [4]. Thus, Fossil could not even borrow to keep up with the tech giants. Yet, despite not spending enough on R&D to be competitive,  Fossil still chose to focus on smartwatches. Smartwatches made up roughly 11% of sales in 2017 which were at a much lower margin than traditional watch sales,   eroding EBITDA margin to 2%  [7]. To underscore how significant this was, market capitalization had fallen from $5.7bn in 2014 to $280mm by the end of 2017. 

Between 2014 and 2019, revenue fell at (9%) CAGR and gross margin fell from 57% to 50% due to the move to Smartwatches and the minimum annual commitments payable in its licensing agreements. EBITDA fell from $662mm to $52mm with margins compressing all the way to 2%. This was also reflected in the cash burn, with the company having its first year of negative free cash flow in 2019.

As earnings fell, Fossil was forced to amend its existing credit agreement. It went from having a fully committed $1.05bn revolver in 2015 to a $325mm asset-based revolver (an ABL Revolver) alongside a $425mm term loan in 2018, all maturing between 2019 and 2020 [5] [8]. Significantly, an ABL Revolver meant that, as inventory, receivables and stores contracted, so would revolver availability. It fell from $661mm in 2014 to $120mm in 2019 to $53mm in 2024. This effectively compounded Fossil’s weak earnings throughout the period by depriving it of liquidity when it was needed most. The covenants became significantly tighter too: minimum trailing EBITDA of $110mm, minimum liquidity of $160mm, capital expenditure capped at $35mm a year, and a 1.15x fixed-charge coverage test springing below $200mm of liquidity [7] [8]. These sorts of maintenance covenants are in stark contrast to the sorts of clauses we see in the present cov-lite environment.

So, after a small rebound from the Covid-19 pandemic, Fossil capitalized on this by obtaining covenant relief. The company issued $150mm of 7.00% notes due November 30th, 2026, and repaid the outstanding term loan [11]. However, there was a price for that freedom. These notes were SEC-registered “baby bonds”, issued in $25 denominations, listed on NASDAQ as ‘FOSLL’ [11]. The critical point to grasp, which we will revisit continuously, is that these notes were governed by Section 316(b) of the Trust Indenture Act 1939. §316(b) stipulates that such notes’ payment terms may not be amended without each holder’s individual consent [28]. Given that these notes would be held through roughly 1,500 accounts, a significant proportion of those being retail accounts, this deal to swap tight covenants for an instrument that would be difficult to renegotiate would come back to haunt Fossil [30] [31].

However, in 2022, when the ABL Revolver had to be extended, a very significant term was introduced: a ‘springing maturity’. Any material indebtedness that is greater than $35mm which matures earlier than when the revolver falls due (November 2027) pulls the revolver forward to the 91st day prior to when the material indebtedness falls due [12]. This means that if the $150mm 2026 Notes are untreated, the 91^st day prior to the notes’ maturity (November 30th, 2026) becomes the revolver maturity. This makes August 31st 2026 the maturity of the ABL Revolver in a downside scenario. 

‘Transform and Grow’, an operational turnaround plan, was launched in early 2023 and closed in 2024, having delivered $280mm of annualised operating income benefit. [14] [15] However, there was not much ‘growing’, but aggressive cost-cutting. For example, Fossil exited smartwatches, closed 45 stores in 2023 and 59 in 2024 [14]. This was really part of a bigger trend, as total assets fell from $1.6bn in 2019 to $764mm in 2024 [9] [14]. Fossil had 619 stores in 2015, but only 248 stores by 2024 [5] [14]. All while revenue still fell faster than operating expenses, culminating in Adj. EBITDA being negative in 2023 and 2024. This is reflected in the company's cash flows, with cumulative free cash flow and overall change in cash being negative for the period. 

As the springing maturity in the ABL Revolver meant it would be falling due in August 2026, the board formed a Strategic Planning and Finance Committee in July 2024 and engaged Evercore in August 2024 [32]. Asset sales were tested from December 2024 across 27 approaches, five of which bid; one agreed sale collapsed over tariffs and production costs. [32] On the refinancing, Evercore went to the existing lender, JPMorgan, and a further 32 institutions [25]. Fossil also went to 19 private-credit and distressed investors on the 2026 notes and new money [25]. However, Fossil was ultimately unsuccessful. 

It was looking bleak for Fossil. Ares’ aggressive proposal was the best the company could achieve in the end. However, on August 13th 2025, the two struck a deal to refinance the existing JPMorgan Revolver. Ares would provide a $150mm secured ABL Revolver at SOFR plus 5.00% with a 2.00% upfront fee, maturing August 13th 2030 [20]. Crucially, however, the ABL Revolver retained the springing maturity clause, and the material indebtedness threshold for the springing maturity was cut from $35mm to $15mm. There were additional terms that required the 2026 Baby Bonds be dealt with before December 2025, which will be discussed shortly [20]. 

Let’s quickly recap and list all the problems that needed to be dealt with in this particularly unique case. However, before we do, there is one date worth keeping in mind as you read this section: November 13th 2025. That was the day Fossil’s 10-Q for Q3 was due. Management had warned that, because of the springing maturity in the Ares ABL Revolver bringing the maturity to August 31st 2026 (as indebtedness was above $15mm), the Revolver in the forthcoming 10-Q would become a current liability [25]. This filing would mean Fossil would have to make a going-concern disclosure. Management believed that such a disclosure would have led to key licensors and suppliers finding ways to terminate, accelerate, or reprice existing contracts, which would have meant a free fall into a US bankruptcy process [25]. Thus, everything you are about to read is a four-month sprint to restructure the FOSLL notes before November 13th 2025. Here is the recap of the issues a successful restructuring needs to solve:

1) Ares’ ‘Successful Exchange’ Conditions: Critically, funding of the new Revolver is conditional on completing the ‘Restructuring Transactions’ by December 30th 2025 and, if a court-sanctioned plan / plan confirmation is needed, that the sanction hearing take place by December 12th 2025. Failure to do so will be an Event of Default, entitling Ares to terminate its commitments under the Revolver, accelerate currently drawn amounts, and draw-stop the financing. This would impair Fossil’s access to “vital liquidity” [25]. Further, lenders will be required to release a $15mm temporary reserve upon successful restructuring of the FOSLL notes, which would further ease liquidity concerns [25]. Practically speaking, while all these dates are past management’s deadline of November 13th 2025, due to the springing maturity and going-concern disclosure, the legal consequences of failing to complete a restructuring in line with Ares’ conditions implied Fossil would struggle to operate in 2026. 

2) §316(b) Trust Indenture Act 1939 and the Impossibility of Collective Action: The statute provides that any holder of an SEC-registered bond's rights to receive principal and interest cannot be impaired without that individual holder’s consent [28]. This means amending the payment terms of the FOSLL notes out-of-court requires unanimity. This introduces a collective action problem as the rational noteholder has an incentive to hold out to extract more value or better terms for the deal where their consent is necessary for a successful restructuring. The ‘baby bond’ structure here makes this even more problematic. The FOSLL were issued in $25 denominations and spread across more than 1,500 retail accounts [31]. Retail investors do not participate in restructuring transactions: Some noteholders will not read or even be aware of the offer documents, making it virtually impossible to co-ordinate a restructuring with an apathetic investor base [30].

3) Avoid Delisting, Retain Equity, and Do Not Disrupt Operations: Avoiding delisting from the NASDAQ was a stated aim for Fossil [25]. The primary reason was to entice potential new money participants with warrants and shares. Delisting would increase the illiquidity of the company’s equity, making the warrants and shares less valuable as consideration. Further, existing shareholders wanted to avoid the downside scenario (discussed below) where they would be wholly out-of-the-money and be written off. Finally, Fossil had $424mm in non-financial unsecured liabilities, which were ‘core operational costs’ for the ‘continuity of the business’ [25]. Leaving these uncompromised and uninterrupted was important to retain confidence with key licensors, suppliers, and landlords and enable the business to continue to trade.

There are four typical options/scenarios that could play out to achieve a corporate rescue. However, all of them will be demonstrated to be unworkable.

1) Refinancing and/or Asset Sales: The Ares ABL Revolver itself was a refinancing of the JPM ABL Revolver, and given that Evercore had approached over 30 possible lenders before eventually putting in place the Ares ABL Revolver, those were the best terms Fossil could obtain in the circumstances. On the Asset Sales option, Evercore had approached 27 strategic buyers on Fossil’s non-core brands since December 2024. Only one sale was tentatively agreed before being abandoned over increasing tariff exposure and production costs, clearly indicating the lack of buyer interest [32].

2) Amend & Extend (A&E): Extending the bonds was not possible without noteholders individually consenting to their impairment, as §316(b) prohibits amendments to core-payment terms such as principal, interest, and maturity [28]. It was unlikely that at least 90% of noteholders ($135mm out of $150mm in value) would have agreed to extend, such that less than $15mm of material indebtedness would fall due before November 2030 (when the Ares ABL Revolver was due, to avoid the springing maturity).

3) Exchange Offer with Exit Consent: An Exchange Offer could be combined with using an ‘Exit Consent’ as a ‘stick’ to motivate participation by making non-participation unviable. An ‘Exit Consent’ would be where a majority of noteholders, which in this case would include the notes held by HG Vora Capital Management and Nantahala Capital Management, vote to impair or strip non-participating noteholders, incentivising them to participate in the exchange offer [25] [33]. There are three reasons this would fail nonetheless. First, retail investor apathy still applies. Second, §316(b) prohibits alteration of payment terms which themselves could be impaired to coerce noteholders. Thirdly, because the notes were unsecured, there was no collateral that could be stripped. Otherwise, stripping collateral would have been an option, given the US Court of Appeals for the Second Circuit’s narrow interpretation of §316(b) in Marblegate, where only non-consensual amendments to core payment terms like principal, interest, and maturity dates are prohibited [29]. Thus, non-consensual amendments which merely affect the noteholder’s practical ability to receive payment are still permitted (this will be relevant later!).

4) Pre-Packaged Chapter 11: It is a fair suggestion to go in-court, as Chapter 11 is capable of impairing the §316(b) notes without requiring each individual noteholder to consent.  However, the threshold for a class to accept a plan is two-thirds in value and, crucially for our purposes, more than half in number (the ‘numerosity requirement’) of voting claims. The difficulty here is that, even if the HG Vora and Nantahala can make up the two-thirds value threshold, the number of claims is dispersed across 1,500 retail accounts [34]. To illustrate, three retail bondholders voting no against two consenting funds defeats the class three-to-two, even if the funds possess over 60% of the value where they are voting in single claims [34]. Now, this does not mean meeting the threshold is impossible; it may be that over half of voting noteholders are in favour. However, it is the lack of certainty that undermines the pre-pack as §1126(c) measures numerosity against claims that actually vote, and turnout across 1,500 accounts is not predictable [30] [34]. This would not have been problematic if HG Vora and Nantahala were in separate classes so they could use Cross-Class Cram-Down (CCCD). However, because the rights that the funds and the retail investors have against Fossil are basically identical, it would be difficult to gerrymander a class for the purposes of CCCD. Gerrymandering is when a company deliberately classifies creditors in a manner to manipulate voting outcomes. 

Given that all of these solutions are unworkable, what would most likely happen if Fossil had to ‘free fall’ into a US Bankruptcy Process? Well, because the notes are the only impaired class, if they rejected the plan, there is no possibility of cram down and reorganization would be objectively futile, preventing them from a Chapter 11 reorganisation. This forces Fossil into a §363 sale and realisation. An analysis by Ankura showed that a $125mm DIP at a 4% PIK would have been needed to hold cash above operating minimum [25]. Accounting for other incremental costs, the FOSLL notes would be expected to recover between 40% and 73% [25]. Avoiding this result and preserving the restructuring surplus was important, but did not seem possible in the US. 

Fortunately for Fossil, a solution existed across the Atlantic. We gave an extensive introduction to the UK Part 26A Restructuring Plan here, particularly focusing on its ability to achieve Cross-Class Cram-Down (CCCD) and how it compares to its Chapter 11. For those unfamiliar: Part 26A was introduced by the Corporate Insolvency and Governance Act (CIGA) 2020, closely modelled on the venerable Part 26 Scheme of Arrangement but adding formal CCCD to English law for the first time. What this update meant is that a class of dissenting creditors no longer could hold up a deal. Under the Scheme, all classes need to meet the statutory threshold of 75% by value and a majority in number for it to succeed. We also have writeups featuring the use of Part 26A Plans in McDermott and Thames Water Part 3 to achieve CCCD. 

However, for our purposes, there are three features of Part 26A that made it tailor-made for Fossil’s difficulties, but none of them had to do with CCCD:

1) No Numerosity Requirement: Part 26A only requires that 75% in value vote in favour of the plan. The logic of this has to do with how bonds are legally treated in the UK (explained in our CCCD Primer). Not only is this a key difference with Chapter 11, but it also differs from the Part 26 Scheme, which does require a majority in number of present and voting creditors. Hence why, even if there is no need for CCCD, only Part 26A in the UK can get around numerosity issues regarding the dispersed 1,500 retail accounts  

2) Selective Restructuring Tool: Chapter 11 is a collective restructuring procedure which aims to deal with the entirety of the debtor’s estate. Therefore, in Chapter 11 you must deal with the entire capital structure and the business’ operations. However, in Part 26A you can be ‘selective’. You can propose a ‘compromise or arrangement’ to treat a selected part of the capital structure, leaving other creditors unimpaired and outside of the plan, even if they are junior to the class of creditors being compromised. Thus, Fossil can treat the unsecured noteholders while leaving the $424mm of accrued unsecured operational liabilities unimpaired to support business continuity.  It also means there is no need to restrict any business operations going forward; business can continue as usual and there is no need to make frequent trips to the court to obtain permission to deal with the company’s assets [30]. 

3) Non-Consensual Release of Third-Party Claims is allowed: The significance of this is better understood in the context of how Stapled-Exchange LMEs have to be structured, so we will explain this difference with Chapter 11 later.  

Still, there are several legal tests, in multiple jurisdictions, that must be met for Fossil to use Part 26A and to make it effective in the US. All while Fossil had a very tight deadline to get this done. There are a lot of moving parts in the story, so we have designed a timeline tracking three categories of events that were happening simultaneously. This timeline will appear frequently in the next section, with each stage numbered and outlined in red to highlight where we are in the transaction and what we will be covering!