Emerging From Chapter 11 Bankruptcy – Part I

Retailers generally file for Chapter 11 bankruptcy as a means of reorganizing store and business operations and/or restructuring over leveraged capital structures.  In order to successfully reorganize in bankruptcy, the retail Debtor must prepare a go-forward business plan (the “Plan of Reorganization” or “Plan”) acceptable to its lenders and creditors.  Once the smoke has cleared and the retailer has successfully emerged from bankruptcy with a Court approved Plan, there are still potential risks and dangers facing the retailer:
  • Did not reject enough store leases while in bankruptcy
  • Did not obtain sufficient exit financing at a reasonable cost upon emergence
  • Inability to rebuild vendor relationships post-emergence
  • Inability to rebuild customer relationships post-emergence
In Part I of this post, we will cover the first two risks:

Did Not Reject Enough Store Leases While in Bankruptcy

Under Chapter 11 bankruptcy protection, the retailer had the opportunity to reject store leases and walk away from unprofitable stores or stores in unwanted locations and markets.  During this evaluation process, the retailer has to evaluate whether to keep or reject certain “bubble” stores or stores on the brink of profitability.  If the rent concessions obtained on these bubble stores were insufficient, or the performance of these stores falls short of forecast, these bubble stores may be unprofitable and become a drag on the financial performance of the retailer.  If certain bubble stores continue to underperform and need to be closed, the post-emergence retailer no longer has the Bankruptcy Code limitations on the amount of lease rejection liabilities for these stores.

Did Not Obtain Sufficient Exit Financing at a Reasonable Cost Upon Emergence

The retailer’s financial flexibility may be severely constrained if it is unable to obtain adequate exit financing at a reasonable cost.  Even if exit financing is obtained, there is a risk that the lender may impose restrictive terms on the retailer, thereby crippling the retailers’ ability to make capital improvements to stores, improve IT systems, and adequately advertise the business or make needed alterations to the product mix.

Look for Part II of this post in May, which will cover issues retailers face around preserving and rebuilding important vendor and customer relationship after emerging from bankruptcy.