The Commercial Law League presented a lively panel on Hot Topics in Retail Bankruptcies featuring Robert Duffy from Berkshire Research Group, LLC, Kenneth Eckstein from Kramer Levin, Mohsin Meghji from M-III Partners, LP, James Sprayregen from Kirkland & Ellis and Marty Staff from BCBG Maxaria.
I will acknowledge up front that I have no idea who made which comments so that all content should be attributed to the panel in general.
An Overview of Retail Bankruptcies
The panel reported trouble across all sectors. Brands used to be the black box of customer preference, but now it’s about price. The e-commerce effect is impacting players across the retail space. Small and mid-market retailers feel the need to develop an e-commerce presence but are not making any money on it. Meanwhile, the cost of cost of keeping a bricks and mortar presence has become a burden.
While the total amount of retail space is decreasing, there are winners and losers. Sears is gone. Walmart and Target are doing well. Circuit City is gone. Best Buy is stronger.
Walmart saw this coming 10-12 years ago. Target has been reinventing itself over and
over. Wal-Mart and Target are the leaders today. However, if they stay the same, they will get killed
but they have shown ability to innovate. Brick and mortar stores are becoming a place to look for selections to make on-line. Meanwhile, the selections in stores are getting smaller making people go online. There is a place for smaller footprint stores but it is not clear whether retailers can they survive the change.
Another trend is re-purposing of retail space. The panel gave the example of a Sears store which was torn down to make way for apartments.
Toys R Us makes a good study for what can go wrong in a retail bankruptcy. It had enough unencumbered assets to get a good
DIP loan. They thought they had an 18 month
runway but faced an aggressive attack from Amazon
and Walmart. The lesson the panel said was that companies can't survive
with this much debt, even with vendor support. Toys R Us ended up administratively insolvent largely because of a massive critical vendor program. In order for a retailer to survive, it must pass the who cares test. Toys R Us thought it would pass it, but wound up with a liquidating plan.
Aeropostale is another case study which illustrates landlords taking a more active role. Simon Properties wanted to own a retailer. Simon and General Growth funded the bankruptcy and became the owners of the new company which was divided into an IP Company and an Operating Company. The company which emerged was much smaller.
The 2005 amendments have limited debtors' time to negotiate to seven months. Another threat to retailers is lenders rolling up pre-petition debt in DIP financing. To survive, a retailer needs someone who cares. That may be junior lenders, vendors or landlords. Debtors need to start planning their bankruptcy soon enough and come in with deal done, which means having someone who can write a check.
Free fall bankruptcies are likely to liquidate. Waiting until liquidity runs out is another prescription for failure.
Retailers shouldn't count on asset-based lenders to help them because ABL lenders don’t have enough risk. Because they money in an ordinary case they don't behave as though they are at risk.
Critical vendors are a bad development. Debtors are facing the dilemma of what if you just say no? There are fewer truly critical vendors. Tech people and shippers are examples of truly critical vendors. Critical vendor programs eat up liquidity. Debtors are better off with shorter terms rather than critical vendor payments. To survive, retailers should cut out critical vendor programs and rollups to give the company a runway.
Dealing with liquidators is a challenge for retailers. 5-7 years ago there were more participants and multiple companies would bid for right to liquidate. What’s changed in the last 6-18 months is that we don’t have competitive forces. The four remaining market players have teamed up so there are just two bidding groups. In order to get a good deal, retainers need to threaten to do it themselves. Sears proved that it had a lot of expertise in self-liquidating. The panel felt that the black magic of liquidators is overvalued but noted that lenders like them.
CLLA Keynote Address
The Commercial Law League program also included a keynote from Mark Weinberg titled How Ronald Reagan Turned Around a Failing Economy and Ended the Cold War.
Mark Weinberg joined the Reagan presidential campaign in 1980, spent all eight years of the Reagan presidency as Assistant Press Secretary and Special Assistant to the President and was Director of Public Affairs for President Reagan for two years after his presidency.
He cited a Reagan quote on bankruptcy.
When a business or an individual spends more than it makes, it goes bankrupt. When government does it, it sends you the bill. And when government does it for 40 years, the bill comes in two ways: higher taxes and inflation. Make no mistake about it, inflation is a tax and not by accident.
He described the five P's which formed President Reagan's approach to governance: planning, people, principles, perseverance and partnering. He said that President Reagan came to Washington with a plan to restart the economy and a plan to wear down the Soviet Union. Weinberg said that Reagan would hire quality people and then stay out of their way. He also said that President Reagan believed that compromise was an essential part of government so long as one did not compromise principles. He also believed that there was no limit to how far a man could go so long as he does not want the credit. He said President Reagan would never say "I alone can fix it."
Mr. Weinberg answered questions from the audience and offered a unique view into a period of our American history. He said that the Iran-Contra scandal demonstrated that President Reagan could be too trusting in the people around him and that he refused to believe that subordinates would lie to his face.
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