Exit Financing for Retailers Emerging from Bankruptcy

In order for a bankrupt retailer to exit from Chapter 11, it needs to ensure that it has sufficient financing for its exit from bankruptcy.  Having enough financing available to operate post bankruptcy is a major factor in the retailer’s initial future success. Unfortunately, the retailer may have some difficulty finding exit financing, at least in the traditional sense, largely due to the continued challenging economic environment, changes in the financing landscape, and potentially onerous terms and conditions that limit the borrowing capability. As a result, the bankrupt retailer needs to evaluate all of its options for funding its exit from bankruptcy. This blog will focus on some sources for and examples of recent exit financing for retailers.

The first place a company typically turns when seeking exit financing is to its existing lenders. The existing lenders’ familiarity with the company’s business and future prospects, the current asset base, the loan documents and recent financial performance, often makes the existing lenders a good option. However, in some cases the existing lenders wish to sever ties with the company and its management after a bankruptcy filing. If this is the case, the bankrupt retailer will have to consider alternative ways of structuring its exit facility.  The retailer may be able to find another lender willing to provide it with a line of credit, asset-based (ABL) and/or term loan. A recent example is The Great Atlantic & Pacific Tea Co., which recently exited from bankruptcy after securing exit financing comprised of a $400 million revolving credit facility and a $350 million term loan.

An alternative source of exit financing is to obtain funding from the existing noteholders, possibly through a rights offering. This option can serve as an addition to funds provided by existing or new lenders. For example, Harry & David Holdings Inc. recently secured a $100 million facility and an amended agreement by supporting noteholders to backstop a $55 million rights offering, which provided it with the necessary equity financing to emerge from bankruptcy. Similarly, Loehmann’s Holdings Inc. secured $45 million in exit financing comprised of a $20 million facility from its existing lenders and a $25 million capital infusion through a rights offering from its Class A noteholders that was backstopped by the existing owners.

The bankrupt retailer should also consider other types of financing sources such as private equity and venture capital. For example, Sbarro, Inc. was able to successfully exit bankruptcy through a $35 million cash infusion. Financing through subordinated debt, sale leasebacks of real estate, factors, trade creditors, and state and local government financing programs should also be considered as alternative sources.

In conclusion, the bankrupt retailer should pursue all avenues of financing to ensure that it has adequate capital to fund the operations of the go-forward business upon emergence, and at a reasonable cost. If it doesn’t, the reorganized retailer may unfortunately end up in bankruptcy again, or even worse, in liquidation.

Are there other funding sources you have seen used to finance a retailer emerging from bankruptcy?