Emerging From Chapter 11 Bankruptcy – Part II

In Part I of this blog post, we discussed two of the potential risks and dangers facing a retailer that has emerged from bankruptcy:
  • Did not reject enough store leases while in bankruptcy
  • Did not obtain sufficient exit financing at a reasonable cost upon emergence
In this post, we will discuss issues retailers face around preserving and rebuilding important vendor and customer relationships after emerging from bankruptcy.

Inability to Rebuild Vendor Relationships

Post emergence, the retailer may face certain financial creditability issues.  If the retailer’s revenues or financial performance falls short of its Plan projections, the retailer may irreparably damage its credibility with its key constituents. Relationships with vendors, suppliers and landlords can be a bit rocky post-emergence.

In bankruptcy, it is common for a number of the retailers’ vendors to insist on cash on delivery (“COD”) before they will ship product.  A major challenge the retailer is faced with post-bankruptcy is negotiating reasonable payment terms with its suppliers.  If the retailer is unable to re-establish reasonable terms, it will have a significant negative impact on the retailer’s cash flows.

Inability to Rebuild Customer Relationships Post-Emergence

Rebuilding customer relationships can be difficult as well.  Bad publicity from the bankruptcy filing may have negatively impacted store foot traffic and some customers may have already switched to competitors.  Reduced employee levels, a common Chapter 11 retail restructuring measure, may have left the retailer with less experienced staff, thereby compromising the level of service provided to customers.  Changes in the retailer’s product mix implemented during or after emergence, may alienate a portion of the retailer’s core customer base and not bring in the expected inflow of new customers, thereby negatively impacting sales.

If the Retailer falls victim to some of risks and dangers discussed in our previous blog post and those discussed above, and is forced into forced into another bankruptcy filing, the odds of avoiding either a complete liquidation or fire sale of the company are significantly increased.

What other issues have you seen retailers emerging from bankruptcy contend with?