Forever 21’s $81.1 million sale to Authentic Brands Group and landlords Simon Property Group and Brookfield may give the retailer another shot at staying in business, but the deal creates more uncertainty for vendors.
On Tuesday, Tyler Cowan, managing director at Lazard Frères & Co. LLC and Forever 21’s investment banker, estimated to the Delaware bankruptcy court on the case that the fast-fashion retailer owes more than $120 million to vendors for goods and services they provided during the bankruptcy, known as administrative expenses. The retailer also owes more than $10 million in administrative expenses to non-merchandise vendors, Forever 21’s advisers told the court.
Administrative expenses generally get priority for repayment over unsecured prepetition claims, an acknowledgement of the bankrupt company’s reliance on vendors’ support to keep its business running. But Cowan was forthright about the prospects of recovery for the remarkably large sum, saying at Tuesday’s hearing that he did not expect the sale’s proceeds to repay Forever 21’s administrative debts. Judge Kevin Gross is expected to approve the sale anyway, given the lack of alternatives.
The saga presents another cautionary tale for vendors shipping to retailers during a bankruptcy, attorneys said.
“The possibility in any of these cases is, if you’re transacting business with a party in bankruptcy, you run the risk that the company could run out of necessary funding and that the company doesn’t perform as it projects during the case,” said David Stein, who co-chairs the bankruptcy and creditors’ rights group at Wilentz, Goldman & Spitzer P.A. Stein is not involved in the Forever 21 case.
Barneys New York, which had its own Chapter 11 plan confirmed earlier this month, had faced similar concerns from vendors during its bankruptcy and sought to mitigate some of this burden. As part of its debtor-in-possession financing, it persuaded lenders to put together a $40 million pool to pay vendors still shipping to Barneys.
But that pool didn’t pay all the vendors who were working with the luxe department store during the bankruptcy — some vendors insisted on cash in advance, or gave Barneys terms, as negotiated with its leadership at the time.
The effect on Barneys’ other purported administrative creditors, including Google and employees, came to view in the weeks before its Chapter 11 plan was confirmed. These creditors highlighted Barneys’ disclosures in its Chapter 11 plan filings that it expected to pay only about between 15 percent to 30 percent to administrative creditors, according to court documents.
In the case of Forever 21, some of its most vocal critics in recent weeks have been vendors and exporters that have said they are owed tens of millions of dollars for services they provided during the bankruptcy. One ad hoc group of Chinese exporters told the court they are owed more than $43 million in administrative claims, while a group of around a dozen vendors from China, Hong Kong and South Korea say they are owed more than $27 million in administrative claims.
The exporters said they had relied in part on earlier vendor support agreements with Forever 21 that they said had assured them they would be paid for their ongoing support.
“Absent timely payment of these claims, the members of the [Ad Hoc Chinese Export Committee] will experience severe financial hardship,” they wrote in a filing Tuesday.
Trade creditors can try to insulate themselves somewhat by changing their payment terms or trying to secure their shipments with a letter of credit, though that too poses challenges, creditors’ rights attorneys said.
A letter of credit creates a third party obligation between a trade creditor and an issuing bank. So in the event of a default, the letter of credit could be drawn on to cover the bill due, putting the bank on the hook. But that obligation could make it harder to work with retailers because they would have to secure such letters of credit by providing some form of security to the bank to cover such proceeds.
“That happens with leases or bigger ticket items,” said Stein of Wilentz, Goldman & Spitzer P.A. “It’s fairly common, [but] it just makes the cost of doing business a little more expensive, [which] also could incentivize the retailer to look for other vendors who don’t require a letter of credit.”
Forever 21 will parse its administrative claims and recoveries for vendors in the months ahead after the sale closes, as the company’s estate in bankruptcy works with the creditors’ committee to devise a plan.
“There’s a tension between the secured creditors, the debtor, the debtor’s management and board of directors, and the trade creditors’ committee that wants to see the company operate as a going concern,” said Stein. “There would be a way to repay creditors if it was sold as a fully operational company, as opposed to a piecemeal sale.”
“You would at least have an ongoing customer, versus an all-out liquidation which doesn’t ensure that trade creditors will have a market to sell their inventory,” he said.