As Neiman Marcus Group explores its financial options, including a potential bankruptcy, during the coronavirus pandemic, the path to and out of bankruptcy court for troubled retailers is unclear.
Retailers usually seek bankruptcy protection as a hail mary after a prolonged liquidity crunch begins strangling their business — usually when they’ve overextended their credit lines to the point that they can no longer service their debt, and they have trouble making lease payments.
But for retailers now dealing with the mass of store closures, supply chain delays and rent issues caused by the pandemic, the bankruptcy proceedings that would ordinarily bring them the relief they need may be harder to seek, attorneys said.
“The idea of a bankruptcy is to give a breathing spell to allow the company to continue to operate while in Chapter 11, and to formulate a plan to deal with its debts,” said Patrick Collins, a bankruptcy and restructuring partner at Farrell Fritz PC. “Given where we are right now…it would be very hard for anyone to model what an exit plan would look like.
“Right now, you can’t really model a liquidation with store sales, because you can’t do store sales — the kind of liquidation plan that happened in Barneys, and which was going to start in Modell’s, is just not going to happen at least for a couple months,” he said, referring to the Barneys New York liquidation sales that took place after its sale to Authentic Brands Group in November, and to Modell’s Sporting Goods Inc., which filed for bankruptcy this month.
Bankruptcy helps retailers in trouble in large part by triggering an automatic stay, or a halt, of all creditor enforcement actions against it. That means the process halts landlords from evicting them, for example, or keeps mortgage lenders from foreclosing on them, or stops creditors who may have obtained judgments against them from seizing the retailer’s collateral or goods.
But bankruptcy also requires financial resources, and a plan that may be hard to devise during a global pandemic. It may be harder to negotiate debtor-in-possession financing to keep the retailer afloat during the proceedings, and to draw up some kind of exit plan, whether through liquidation, a going-concern sale, or a restructuring, bankruptcy, attorneys said.
“Everything in a restructuring case comes down to valuation,” said Sharon Weiss, a partner at Bryan Cave Leighton Paisner LLP, who has advised retail industry clients on bankruptcy issues. “The difficulty now is in being able to value, or estimate sources of revenue.”
The temporary halt in the Modell’s bankruptcy proceedings in New Jersey offers a glimpse at how the pandemic has thrown a wrench into the proceedings. The sporting goods chain, which filed for bankruptcy this month in order to start liquidating, on Friday managed to persuade the court to halt the proceedings until April 30.
The unusual development, which comes amid store shutdowns due to the pandemic, puts the company and its stakeholders in a kind of limbo. Landlords, usually entitled to be paid rent during the bankruptcy, won’t be during this pause period, and there is a significant risk of administrative insolvency — that means that rather than the orderly liquidation Modell’s had in the mind, the case could convert to a Chapter 7 bulk liquidation with much smaller recoveries to be had.
“[Modell’s] inventory is just sitting there, frozen in time,” said Joseph Lemkin, a shareholder at Stark & Stark, who is representing a landlord in Modell’s bankruptcy. “You’re going to end up with product that’s going to become out of season, and the value is going to end up depreciating.”
In the meantime, the path for many retailers might be to try to negotiate arrangements with their lenders to ask them to put off debt service payments for a few months, and to similarly ask landlords to defer rent payments. After those stop-gap measures, however, attorneys are expecting a wave of retail bankruptcy filings once the immediate crisis period comes to an end.
“What I think is going on right now is that these retailers are probably speaking to lenders and landlords to get short relief just to deal with the crisis,” said Collins of Farrell Fritz PC. “To try to stay intact, so that when the thaw comes and they can open their stores back up, they’re in a position then to get their DIP financing and file for bankruptcy.”
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