It wasn’t just that the apparel brand filed for Chapter 11 — as a number of troubled retailers are expected to do in coming months amid extended store closures — but that it appears to be taking a much more frugal approach. In filings in Delaware bankruptcy court, where it had previously filed for bankruptcy in 2017, the company asked the court to allow it to defer rent payments for roughly two months, a rare ask that shows the strain on companies filing for bankruptcy protection during the pandemic.
The bankruptcy code requires companies to make timely rent payments, but a firm can invoke a provision of the code to ask for a 60-day extension to start paying rent if it can show good reason. Such a move would simply defer the rent payments, and not waive them for the duration, which means the company would still be on the hook. True Religion said it is currently unable to pay the roughly $1.8 million in obligations under its “unexpired real property leases” in the first 60 days of the bankruptcy. The brand said it is also asking to reject the leases of at least 14 retail stores.
“Whether they’re going to have the money at the end of the 60 days is a good question,” said Patrick Collins, bankruptcy and restructuring partner at Farrell Fritz P.C., who is not involved in the case and commented generally.
“In most retail bankruptcy cases, there’s no request for a 60 day-extension,” he said.
In its filings Monday, True Religion described how the pandemic sapped its revenue and strangled liquidity as it closed all its 87 retail stores and furloughed more than 90 percent of its workforce of roughly 1,000 employees. The brand’s interim chief financial officer Richard Lynch wrote in a declaration that the lockdown-related store closings “have caused a sudden and unplanned elimination of approximately 80 percent of the company’s revenue, making a Chapter 11 filing unavoidable.”
The company said in filings that its e-commerce business is still “viable” and that its distribution centers are still running, as a number of shelter-in-place orders around the country consider such operations to be “essential.”
True Religion is also leaning on its existing lenders for debtor-in-possession financing, after it struck out with potential new third party lenders “in a marketplace currently decimated by the effects of the COVID-19 pandemic and attendant economic fallout,” according to a declaration in the case by financial advisory firm Province Inc.’s principal Michael Atkinson.
The company said it lined up nearly $89 million in financing from pre-bankruptcy lenders, including some $8.4 million in what it described as “new money” loans, though it seems much of its other DIP financing could go toward paying down its $140 million in pre-bankruptcy secured debt.
“It appears that those constituencies must have recognized that it was in their best interest to advance some new money in order to preserve value, at least for a couple of months, to see what comes of it,” said Collins of Farrell Fritz, of the lenders.
True Religion has currently left its options open, saying it would either decide by May 15 to file a Chapter 11 plan of reorganization, or by June 5 to try to execute a going concern sale or “full chain liquidation.”
The filings highlight the complicated choices for retailers currently in financial trouble. A liquidation could be a challenging prospect during the lockdown and restrictions on public gatherings that have curtailed shopping, attorneys said. If a liquidation does take place, it’s possible that any sale of inventory may have to wait.
It’s also harder to assess companies’ worth while the landscape of viable businesses is changing, attorneys said.
“You can’t sell off your inventory, and no one knows what the value of any brand is until we get into the third and fourth quarter of the year, and see who survives,” said David Wander, who chairs the bankruptcy financial restructuring and creditor rights department at Davidoff Hutcher & Citron LLP, and commented generally.