The first signs lie in how these prospective bankruptcies will play out — whether retailers filing for Chapter 11 can use the process to pull off a going-concern sale or survive as a reorganized business, or if they simply end up being sold off in parts.
“Most debtors at least enter Chapter 11 with the idea of selling their business, or being able to reorganize, where they would drop their unprofitable locations and reorganize around profitable locations,” said Stephen Selbst, co-chair of Herrick Feinstein LLP’s finance litigation and restructuring group.
“But often, pre-bankruptcy lenders will push for a sale of the company or a sale in pieces,” he said.
The key players driving existential decisions for companies in bankruptcy are likely to be those among the secured lender groups that face more risk, bankruptcy experts said. Retailers typically have a hierarchy of lenders who have priority to have their loans repaid. In the case of Neiman Marcus, for instance, the troubled retailer’s lenders have been working out how different bankruptcy scenarios would affect their prospects for repayment.
In general, at the top of the totem pole are first-lien lenders, often banks, who have liens on a retailer’s inventory, accounts receivable and even real estate, and are therefore most likely to be repaid in full. Below them are second-lien lenders, who are less secured, and may push the retailer to make choices geared toward ensuring their repayment.
“There’s a risk that they won’t be paid in full, which gives them the most negotiating leverage,” said Selbst. “That’s a common pattern that we see in a lot of retail bankruptcies.”
Attorneys are watching for the potential filings of companies like J. Crew and Neiman’s for signs of the strategy that they are signaling they will take.
Legacy brands tend to open their bankruptcy proceedings with reaffirmations of their name recognition and cultural significance, and often underscore their plans to keep the business alive. Forever 21, for instance, pegged its legacy to no less than the ideal of the American dream in its first day bankruptcy filings in Delaware, while attorneys for Barneys New York had pitched the mission in bankruptcy court as a “full-fledged battle” to keep a renowned cultural institution alive.
It’s possible that retailers like J. Crew and Neiman’s may adopt a similar narrative. But it will be even harder for retailers filing for bankruptcy now to signal an optimistic vision and strategy, when store reopening timelines are still being worked out and are inconsistent around the country, attorneys said.
“The story is going to start out sounding like, ‘This is a viable company, with a viable brand and has a place in the marketplace,’” said Robert Fishman, co-chair of Fox Rothschild LLP’s financial restructuring and bankruptcy department.
“But the absence of any objective information with which to build a projection makes it literally impossible to map a path going forward,” he said. “I think they’re going to try as best they can to march in place for a while.”
Retailers that have filed for bankruptcy so far amid the pandemic have been trying to do just that. On Tuesday, Pier 1 Imports Inc. persuaded the Virginia bankruptcy court overseeing its case to extend its rent deferment period, and on Thursday, Modell’s Sporting Goods Inc. convinced the New Jersey bankruptcy court to grant a similar concession. The judge in the Modell’s case also directed the retailer to mediate with creditors including landlords.
“Given this utterly unbelievable thing that’s going on in the world, bankruptcy judges are trying to accommodate the concept of maximizing value — a theme of bankruptcy,” said Kenneth Rosen, who chairs the bankruptcy, financial reorganization and creditors’ rights practice at Lowenstein Sandler LLP, which represents the unsecured creditors committee in the Modell’s bankruptcy.
“They’re also trying to accommodate the dilemma of the lender, and trying to accommodate the dilemma of the landlord,” he said.