The bankruptcies of major retailers — including Barneys New York, J.C. Penney, Brooks Brothers and others — highlight a feature of the bankruptcy process that is likely to draw more investors as retailers wind up in court: the bankruptcy sale.
Bankruptcy court, while an expensive venue for retailers, can be an attractive site for investors looking to buy valuable assets, including a legacy retailer’s brand name and its other intellectual property, as well as its reorganized lease portfolio and online business, bankruptcy experts have noted.
The recent spate of retail bankruptcies has drawn investors seeing opportunity and sometimes forming alliances, including licensing company Authentic Brands Group, financial services firm B. Riley Financial, and landlords Simon Property Group and Brookfield, among others.
As bankruptcy attorneys look ahead to more bankruptcy filings in the year after the current lull, they anticipate that companies looking to acquire brands are likely to view getting involved in retail bankruptcies as a part of their acquisition strategy.
“Certainly for investors who want to buy distressed assets, you get assets free of liability [in a bankruptcy],” said Patrick Collins of Farrell Fritz P.C., referring to the ability of retailers to use Chapter 11 proceedings to shed liabilities including liens and debts.
“You can have the target company shed unprofitable locations and the like,” he said. “The new paradigm in some of these retail cases is actually just to get the [intellectual property], not even the bricks-and-mortar, which gives you a lot of freedom, without the infrastructure and all the cost that goes with that, to reinvent the brand.”
In bankruptcy proceedings, potential buyers also have the opportunity to play multiple roles in the process, acting debtor-in-possession lenders to help finance the bankruptcy, and then following up in the process with a bid for assets. In the Brooks Brothers bankruptcy last year, for instance, ABG and Simon entered the fray with a DIP loan, followed by SPARC Group, a joint venture of ABG-Simon Property Group acquiring the business out of bankruptcy.
The bankruptcy process also creates pathways for secured lenders to become owners, including by using a tool known as credit bidding. A credit bid allows a secured lender to use the value of the loan they own in the company toward their bid to purchase its assets down the road, even if they purchased the loan itself at a discount. One of the components of the J.C. Penney sale process had involved a credit-bid by a group of first lien-lenders, which led to a dispute with a rivaling lender faction that was eventually resolved.
“That’s why it’s very hard in those situations for competing bidders to compete against the credit bid,” Collins said. “A credit bidder has that advantage against others who have to use their own money from dollar one.”
The bankruptcy process is also attractive for investors looking to buy retail assets with improved lease contracts, as bankruptcy proceedings can help facilitate lease renegotiations for rent reductions as well as changes to lease structure, attorneys said.
During the course of bankruptcy proceedings, retailers with a strong presence at the malls they’re negotiating with might be well-positioned to negotiate more favorable lease structures that allow them to pay rent as a percent of their income rather than as a set amount.
“What we’ve seen during [the pandemic] is that when the lease portfolio can be restructured, it can create more value,” said Bradford J. Sandler, who co-chairs the creditors’ committee practice at Pachulski Stang Ziehl & Jones. “[It helps] businesses take what’s a fixed cost and make it a variable cost tied to their business, [and] that reduces their risk profile.”