Here’s why retailers take so long to file for bankruptcy
There are going to be a lot of personal bankruptcies in the weeks and months to come.
Timing is key and having a plan is everything, experts say, because a bankrupt crash landing is suicide.
While 630,000 retail businesses have been closed since mid-March, customers and employees alike are wondering who is going to pass to the other side of the Big Reset, as some are starting to call this recovery.
Dallas-based Neiman Marcus and Plano-based JC Penney have landed on most analysts’ watch lists as their heavy debt has been magnified by the pandemic.
Gordon Brothers, a go-to retail liquidator, has estimated that up to 25,000 stores and 100,000 restaurants could end up shutting down permanently this year as companies scrutinize store leases and locations and abandon those that do. are at the limit.
That prediction hangs over the fact that stores and malls will start opening in Texas on Friday and have started opening in a handful of other states.
“It may take some time before you see a rash of [bankruptcy] deposits, a window of 60 to 120 days, ”said J. Robert Bob Medlin, senior managing director of FTI Consulting. Medlin has worked in financial restructuring for 40 years and FTI helps companies manage change and risk.
“Uncertainty is preventing a lot of people from going to bankruptcy court,” Medlin said, “because there isn’t a lot of visibility. “
The bankruptcy of Fort Worth-based Pier 1 Imports was essentially put on hold when all of its stores were closed due to the pandemic. He filed his case in mid-February and began to close its doors in half of its 900 stores. All of this has been stopped, and without income, it burns funds. In bankruptcy, when you run out of money, there is no more.
Of course, Pier 1 management didn’t know what to expect when they filed their case, and other companies are feeling the same now.
Over the past five weeks, retailers have done everything possible to avoid bankruptcy.
They preserve their cash flow by deferring rent, freezing costs, cutting wages, laying off employees and laying off contractors. They reduced their lines of credit to create a bigger cash cushion. They can sell assets.
“All of these things are things that businesses can do to adapt to downturns, but there have never been any like what we are seeing now,” Medlin said.
A first step in filing for bankruptcy is obtaining funds to use while the business is in court protection. Debtor in charge financing begins with a forecast of 13-week cash flow requirements.
“It’s up to Retail 101 to figure out short-term cash flow, how much money is needed to run,” and it’s not easy to do today, Medlin said. “Next, companies have to show lenders a plan for their survival. “
Many retailers didn’t pay April’s rent, but now lenders, landlords and retailers are all in the same boat. said Mark Dufton, CEO of real estate at Gordon Brothers.
“There is starting to be a heightened sense of cooperation going through the months of April, May and June,” Dufton said. “I don’t think anyone in the industry wants years of litigation in court.”
The goal now is to get through the COVID period and take a close look at their store portfolios in the future, he said in a webinar hosted on Tuesday by Coresight Research founder Deborah Weinswig.
Retailers are also looking for properties that could be sold to raise funds, especially if they are trying to avoid bankruptcy, Medlin said.
Banks are now working with retailers on their loan terms, offering 90-day debt moratoria, waiving fees and allowing them to draw on lines of credit, he said.
This will help retailers buy two to three months to see what the world will be like.
The clocks are starting to go bankrupt. A huge one for retailers is a maximum of 210 days – 120 days upfront and an often granted 90-day extension period – for them to accept or reject store leases, Medlin said.
One of the main reasons retailers reorganize in bankruptcy is to get rid of unprofitable leases. Right now, stores are combing their leases to see which stores they would ask a court to close.
It takes longer in a world that is going to be different.
The other big reasons retailers have historically filed for bankruptcy is to deleverage unsustainably, typically from debt buyouts, a prevalent problem in retailing in the United States today.
As negotiations continue with the lenders and both Neiman Marcus and Penney have said they have not paid their debts, speculation has centered on whether the companies are planning any court reorganizations. The two said they were preparing for various scenarios, but no decision was made.
Medlin said some companies are now on lists of probable bankruptcy filings that he remembers were on lists as early as the 1990s. But companies can eventually run out of options. To obtain financing or attract a new owner, they must prove that they have a plan to become a permanent business with a role in the market.
Closing the COVID-19 pandemic will force more of them out of business than ever before, Medlin said.
And as if a pandemic weren’t enough, there are always people taking advantage of the desperate appearance of retailers – potential buyers.
These include strategic buyers and hedge funds or private equity, Medlin said. “There are people who run funds that invest in distressed situations where they think there is long-term value and they can buy at distressed prices.”
A business never wants to go bankrupt with a hard landing, without a plan, Medlin said.
There’s a reason people say, “It’s easier to go broke than it is to get out of it.
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