NEW YORK, United States When Modells Sporting Goods filed for Chapter 11 Bankruptcy in March, it was supposed to be a standard liquidation: the New York-based retailer would conduct going-out-of-business sales at its 134 locations and then close the stores. The proceeds would go to creditors.
Just days later, many US states went into lockdown. Modells stores closed, making going-out-of-business sales impossible. On March 27, a New Jersey bankruptcy judge granted Modells a month-long reprieve, which was later extended to the end of May.
Retailers are caught in an unusual, if not unprecedented situation: they are starting to go bankrupt because the economy is shut down, but the bankruptcy process itself is a casualty of the lockdowns.
The repercussions go far beyond a few delays: in the US, companies use the bankruptcy process to reduce unmanageable debt loads, wiggle out of orders for unsellable clothes and cancel onerous store leases. Those benefits are difficult to realise when stores are closed and the legal system has slowed to a crawl.
In a normal bankruptcy process, the path forward is clear: theres reorganisation and a cleaned up balance sheet, said Matt Kaden, managing director at financial services firm MMG Advisors. So much of a bankruptcy is based on being able to liquidate assets, but what happens now when thats impossible?
In fashion, the list of bankrupt brands is growing longer by the day: it includes large retailers Neiman Marcus, plus smaller brands including True Religion, John Varvatos. A filing by J.C. Penney is expected soon. Credit agency Moodys is expecting the default rate for retail and apparel companies to surge between now and next year, from a pre-Coronavirus estimate of 6 percent to 17.2 percent.
J.Crew and Neiman Marcus both filed for Chapter 11 bankruptcy protection last week, complete with plans for how they could emerge from the process with healthy finances in the space of a few months.
Some financial experts argue that filing for bankruptcy makes more sense than ever as retailers can be protected from economic uncertainty for a few months. A backlogged bankruptcy court could mean that a judge would be more deferential toward the companys management decisions, said Susheel Kirpalani, partner at law firm Quinn Emanuel.
Companies may be able to count on their investors to keep them afloat by exchanging debt for increased ownership stakes, Kirpalani said. The investors would be gambling that their stakes would generate higher returns than the portion of their loans they would be able to collect from a bankrupt retailer.
J.Crew effectively handed the reins to its top creditors, including hedge fund Anchorage Capital, agreeing to convert $1.7 billion of debt into equity. Pier 1 Imports took this approach as well after the worsening pandemic dimmed the furniture retailers chances of finding a buyer in a bankruptcy auction.
Nothing is certain in bankruptcy, however, and the stakes are high. Companies must indicate a recovery is possible within six months of filing, or creditors can urge a bankruptcy judge to force a liquidation. Covid-19 has made this process even more unpredictable, as even the most meticulous recovery plans could be derailed if the economic climate turns out to be worse than expected, or new outbreaks force stores to close again.
The ultimate goal of a chapter 11 plan is to file a plan of reorganisation, which will be voted on by creditors, said Joseph Lemkin, partner at law firm Stark & Stark. In order to be approved by the court, the plan must be feasible. Given the uncertainty in retail, it may be difficult for retailers to come up with...a [feasible] proposed plan."
Get the Money Up Front
When a corporation files for Chapter 11 bankruptcy, it typically follows one of three scenarios: liquidation (Roberto Cavalli), reorganisation (J.Crew) or sale (Barneys New York), though some level of liquidation is likely to take place in every case.
In each scenario, companies need financing to keep operating while they work through the bankruptcy process. This money is known as a debtor-in-possession, or DIP, loan, typically backed by a retailers assets. Neiman Marcus, for example, was in negotiation with its lenders for weeks leading up to its filing on May 7. Before it had secured its current $675 million in financing, a challenger group of investors, including distress-focused investment firm Mudrick Capital Management L, submitted a $700 million DIP proposal pushing for Neiman to sell itself.
Retailers must normally liquidate some assets to secure DIP funding in order to guarantee the lenders at least some of their cash back. Often part of any bankruptcy proceeding, brands and store operators have to monetise their existing inventory in order to continue operating during the bankruptcy. Rent, for instance, is still an expense during the course of restructuring. Liquidation will be hard to do as long as stores are closed.
Early bankruptcy filers have another advantage though: banks still have plenty of money to lend to distressed retailers. That may not be true if a wave of large brands file for Chapter 11 all at once.
Retailers, healthy and distressed alike, have tapped their credit lines with banks, which are now overextended and cautious about the sector, said Danielle Garno, the head of the fashion, beauty and luxury goods practice at law firm Cozen OConnor.
If everyone files at the same time, theyll be fighting for the same fewer dollars, she said.
It might be smart to file for bankruptcy sooner rather than later to avoid the crush, according to Kirpalani. In the airline industry, those that were in bankruptcy early and emerged early were on a stronger footing maybe itll be similar in retail, he said.
The Takeover Opportunity
Hedge funds with existing stakes in struggling retailers see bankruptcy as a way to acquire companies at bargain prices, such as in the case of J.Crew and its hedge fund debtor, Anchorage Capital. Neiman Marcus has a similar arrangement where creditors have exchanged its $5 billion of debt for equity in the company, though its unclear which types of firms are leading the deal.
Many funds were already in the market for acquisitions, and they see opportunities in the plunging valuations for once-hot direct-to-consumer brands and struggling mall retailers alike.
Hedge funds have been sitting on a fair amount of cash and now they figure the returns they can generate by providing fairly secure financing [to bankrupt retailers] exceeds what they can get in other places, said Kirpalani of Quinn Emanuel.
Bankruptcies Upon Bankruptcies
Investors will likely have their pick of retailers to buy.
When a big box retailer like J.C.Penney goes under, there will be a ripple effect in the retail landscape, starting with vendors and neighbouring stores in the mall.
People can hate on J.C.Penney all they want but that is an anchor store at a mall, and the mall will be a dead mall unless they add something else to fill that space, said Gabriella Santaniello, founder of consultancy A Line Partners.
Some vendors rely on one retailer for the bulk of their business. When that business is unable to pay its bills and liquidates, these suppliers find themselves at the back of the line for repayment, behind DIP lenders.
This kind of loss could trigger bankruptcies of their own. After Barneys went bankrupt, for instance, a number of emerging jewellery brands lost 50 percent or more of their business.
The Survivor Opportunity
As more incumbents fail to measure up, those that do adapt to the new normal will end up thriving, said Mickey Chadha, vice president of Moodys Investors Service. Theyll also benefit from having fewer competitors. Case in point? The demise of Barneys paved the way for Saks Fifth Avenue and Neiman Marcus to be the only two national luxury retail department store chains in the US.
The stronger players going into the crisis will take more market share when they come out, he said.
For some retailers, bankruptcy may be the only path to joining the ranks of survivors. Neiman Marcus and J.Crew are both successfully refinanced their debt and are on the restructuring trajectory, rather than liquidation. Because of the uncertainties in retail ahead and the temporary impossibility of liquidation, stakeholders in the industry have reason to be optimistic about recovery, according to Jonathan Treiber, chief executive of retail management platform RevTrax.
Sometimes the situation is so bad that the retailer actually has leverage, and right now I think thats true because theyre facing unprecedented risk, he said. This requires lenders to be much more flexible than before, when liquidation was still an option.
Were tracking the latest on the coronavirus outbreak and its impact on the global fashion business. Visit ourlive blogfor everything you need to know.
Related Articles:
Life After Bankruptcy: Why Some Brands Survive and Others Dont
Can Neiman Marcus Survive Bankruptcy?
J.Crew Says Bankruptcy Is the Reset it Needs. But There Actually Has to Be a Reset.
Continue reading here:
What the Bankruptcy Onslaught Means for the Future of Retail - The Business of Fashion
- Alitalia Files for Bankruptcy, but Italy Balks at a Third Bailout - New York Times - May 3rd, 2017 [May 3rd, 2017]
- A Slow Bankruptcy Process Stops Locale-Reviving Jobs - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Bankruptcy auction for property of NASCAR artist Sam Bass ... - Charlotte Observer - May 3rd, 2017 [May 3rd, 2017]
- Obamacare helped make a 50% dent in personal bankruptcies ... - MarketWatch - May 3rd, 2017 [May 3rd, 2017]
- Pennsylvania Toy Seller Files For Bankruptcy - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Puerto Rico Enters Bankruptcy - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Puerto Rico Declares a Form of Bankruptcy - New York Times - May 3rd, 2017 [May 3rd, 2017]
- Farmer Mac Early Exclusive: Farm Bankruptcy Rates Low - AgWeb - June 6th, 2017 [June 6th, 2017]
- Washington weighs in on Westinghouse bankruptcy | News ... - Aiken Standard - June 6th, 2017 [June 6th, 2017]
- 4 Reasons Why Puerto Rico's 'Bankruptcy' Process Matters to US Residents - NBCNews.com - June 6th, 2017 [June 6th, 2017]
- Valeant: There Is Significant Bankruptcy Risk Here - Seeking Alpha - June 6th, 2017 [June 6th, 2017]
- Westinghouse bankruptcy draws federal scrutiny as VC Summer nuclear project's future remains unclear - Charleston Post Courier - June 6th, 2017 [June 6th, 2017]
- Bebe Avoids Bankruptcy Filing With Real-Estate Deals - Wall Street Journal (subscription) - June 6th, 2017 [June 6th, 2017]
- rue21 Bankruptcy Objections Filed - Bankrupt Company News (press release) (blog) - June 7th, 2017 [June 7th, 2017]
- ISH to emerge from bankruptcy as Seacor subsidiary - WorkBoat (blog) - June 7th, 2017 [June 7th, 2017]
- Curtains for the Pearl, as the Theater Company Files for Bankruptcy - New York Times - June 7th, 2017 [June 7th, 2017]
- Bankruptcy fraud earns Pepperell man 18 months | Boston Herald - Boston Herald - June 9th, 2017 [June 9th, 2017]
- Vikki Lindemuth favors appointment of trustee to handle husband's bankruptcy - Topeka Capital Journal - June 9th, 2017 [June 9th, 2017]
- Creditors seek to force bankruptcy of Tinley Park firm - Chicago Tribune - June 9th, 2017 [June 9th, 2017]
- Abengoa Bankruptcy Liquidation Plan Confirmed - Bankrupt Company News (press release) (blog) - June 9th, 2017 [June 9th, 2017]
- Retailer BCBG Unveils Going-Concern Bankruptcy Sales - Wall Street Journal (subscription) - June 9th, 2017 [June 9th, 2017]
- For Hartford, bankruptcy not an easy way out - The CT Mirror - June 9th, 2017 [June 9th, 2017]
- Why Students Should Be Able To Declare Bankruptcy On Their Loans - ATTN: - June 10th, 2017 [June 10th, 2017]
- Bankruptcy forces curtain to fall on community theater - Chicago Tribune - June 10th, 2017 [June 10th, 2017]
- Ex-Pepperell man jailed in bankruptcy case - Lowell Sun - June 10th, 2017 [June 10th, 2017]
- Owner of Joe's Crab Shack files for bankruptcy | Jacksonville News ... - Florida Times-Union - June 11th, 2017 [June 11th, 2017]
- Why test for bankruptcy law is a larger test for India - The Indian Express - June 11th, 2017 [June 11th, 2017]
- Tax trouble firms' most likely road to bankruptcy - Albuquerque Journal - June 12th, 2017 [June 12th, 2017]
- Darius Miles' Bankruptcy Sale Includes Signed LeBron James, Larry ... - Bleacher Report - June 12th, 2017 [June 12th, 2017]
- Winter Haven attorney gets prison for concealing assets in ... - News Chief - June 12th, 2017 [June 12th, 2017]
- Children's retailer Gymboree files bankruptcy, closing up to 450 stores - USA TODAY - June 12th, 2017 [June 12th, 2017]
- Another retailer has filed for bankruptcy - mySanAntonio.com - June 13th, 2017 [June 13th, 2017]
- Esperanza Unida bankruptcy delays city redevelopment efforts - BizTimes.com (Milwaukee) - June 13th, 2017 [June 13th, 2017]
- Square 1 Burgers files bankruptcy, blames over-saturated restaurant market - Orlando Sentinel - June 13th, 2017 [June 13th, 2017]
- Big KC manufacturer files for bankruptcy - Kansas City Business Journal - June 13th, 2017 [June 13th, 2017]
- Canadians Have Been Refinancing To Delay Bankruptcy - Seeking Alpha - June 13th, 2017 [June 13th, 2017]
- Gymboree Files For Bankruptcy, Plans To Close At Least 375 Stores - Forbes - June 13th, 2017 [June 13th, 2017]
- Sears, J. Crew, Claire's Are Bankruptcy Risks (SHLD) | Investopedia - Investopedia - June 14th, 2017 [June 14th, 2017]
- Tampa's Square 1 Burgers files for bankruptcy protection - Tampabay.com - June 14th, 2017 [June 14th, 2017]
- RBI, Banks And NPAs - First, Reform India's Bankruptcy Code, Then Force Defaulters Into It - Forbes - June 14th, 2017 [June 14th, 2017]
- Retail bloodbath: Bankruptcy filings pile up - CNNMoney - June 14th, 2017 [June 14th, 2017]
- Bankruptcy cases show we've become a nation of selective justice - New York Daily News - June 14th, 2017 [June 14th, 2017]
- Soupman of 'Seinfeld' Soup Nazi fame files for bankruptcy protection - USA TODAY - June 14th, 2017 [June 14th, 2017]
- Strack & Van Til bankruptcy case moved to Illinois - nwitimes.com - June 16th, 2017 [June 16th, 2017]
- Lawsuit: Wells Fargo revised mortgages in bankruptcy without permission - USA TODAY - June 16th, 2017 [June 16th, 2017]
- France's CGG files for bankruptcy protection - MarketWatch - June 16th, 2017 [June 16th, 2017]
- 'Soup Nazi' company files for bankruptcy - CNNMoney - June 16th, 2017 [June 16th, 2017]
- France's CGG Group Files for Bankruptcy Protection - Wall Street Journal (subscription) - June 17th, 2017 [June 17th, 2017]
- Company of businessman behind polo facility expansion files for bankruptcy protection - Fauquier Times - June 17th, 2017 [June 17th, 2017]
- Vehicles involved in Dusty Old Cars bankruptcy to be auctioned - WMUR Manchester - June 17th, 2017 [June 17th, 2017]
- Could Illinois be the first state to file for bankruptcy? - CBS News - June 17th, 2017 [June 17th, 2017]
- Takata Said to Ready Bankruptcy Filing Ahead of Sale to Rival - New York Times - June 17th, 2017 [June 17th, 2017]
- Greece escapes brush with bankruptcy but austerity still bites - FRANCE 24 - June 17th, 2017 [June 17th, 2017]
- Pawnbroker A-OK cites embezzlement in multimillion-dollar bankruptcy - Wichita Eagle - June 18th, 2017 [June 18th, 2017]
- Clock is Ticking on India's Bad Bank Debts Under Bankruptcy Laws - Bloomberg - June 18th, 2017 [June 18th, 2017]
- Surveyor dealing with fine, bankruptcy - Muncie Star Press - June 18th, 2017 [June 18th, 2017]
- Mode Media Assets Acquired by Wedding Ad Network BrideClick in Bankruptcy Deal - Variety - June 18th, 2017 [June 18th, 2017]
- San Bernardino officially out of bankruptcy - San Bernardino County Sun - June 20th, 2017 [June 20th, 2017]
- 22 retailers that are at serious risk of bankruptcy - Chron.com - June 20th, 2017 [June 20th, 2017]
- What to expect in defective air bag maker Takata's looming bankruptcy - USA TODAY - June 20th, 2017 [June 20th, 2017]
- Could Illinois file for bankruptcy? - FOX Illinois - June 20th, 2017 [June 20th, 2017]
- Exploding airbags: Takata shares plummet 17% on bankruptcy reports - CNNMoney - June 20th, 2017 [June 20th, 2017]
- These 14 Stores May Be on the Brink of Bankruptcy | NBC Southern ... - NBC Southern California - June 21st, 2017 [June 21st, 2017]
- Medical bankruptcies - WEAR - June 21st, 2017 [June 21st, 2017]
- After five long years, San Bernardino is officially out of bankruptcy. What's next? - Los Angeles Times - June 21st, 2017 [June 21st, 2017]
- Takata to file for bankruptcy Monday, SMFG to provide bridge loan: sources - Reuters - June 22nd, 2017 [June 22nd, 2017]
- Sears Canada files for bankruptcy - CNNMoney - June 22nd, 2017 [June 22nd, 2017]
- Foundation Healthcare Chapter 11 Bankruptcy - Bankrupt Company News (press release) (blog) - June 23rd, 2017 [June 23rd, 2017]
- Implant Sciences Bankruptcy Objections Filed - Bankrupt Company News (press release) (blog) - June 23rd, 2017 [June 23rd, 2017]
- Puerto Rico Bankruptcy: Uncertainty, But Also Stock Profit Opportunity - Seeking Alpha - June 23rd, 2017 [June 23rd, 2017]
- Lakeland day care files for bankruptcy without paying workers - wreg.com - June 23rd, 2017 [June 23rd, 2017]
- Sears Canada Closing 59 Stores as It Seeks Bankruptcy Protection - Fortune - June 23rd, 2017 [June 23rd, 2017]
- Takata to file for bankruptcy Monday, SMBC to provide bridge loan: Sources - CNBC - June 23rd, 2017 [June 23rd, 2017]
- How Sears Canada's Bankruptcy Impacts Sears Holdings Corp. - Seeking Alpha - June 23rd, 2017 [June 23rd, 2017]
- Augusta native sworn in as newest Bankruptcy Court judge - The Augusta Chronicle - June 24th, 2017 [June 24th, 2017]
- Takata reportedly planning to file for bankruptcy - CNBC - June 24th, 2017 [June 24th, 2017]
- Bankruptcy - money_selfhelp - June 24th, 2017 [June 24th, 2017]
- Japan press - Takata expected to file for bankruptcy protection in Tokyo - ForexLive - June 26th, 2017 [June 26th, 2017]
- Bankruptcy guru Edward Altman sees similarities to 2007 in the credit market today - Yahoo Finance - June 26th, 2017 [June 26th, 2017]
- Takata's woes expected to continue beyond bankruptcy filing amid mounting recall costs - CNBC - June 26th, 2017 [June 26th, 2017]