May/June 2010

Iconic Name Survives Thanks to a Well-Executed §363 Sale

Given the long list of costly, contentious and ultimately unsuccessful retail bankruptcies, much attention has been given to the particulars surrounding Filene’s Basement’s Chapter 11 proceedings that culminated with a §363 sale to Syms Corp. What follows is a behind-the-scenes look at these events that bucked a trend in more ways than one.

When Filene’s Basement filed for Chapter 11 bankruptcy protection in May 2009, the news made business headlines far beyond the retailer’s home turf along the East Coast. “It was in the press across the country,” recalls Alan Cohen, chairman of Abacus Advisors and the chief restructuring officer in the case. “We fielded inquiries from California, everywhere. It was big news.”

Would this household name in value-oriented apparel merchandising join the likes of Linens ’n Things, KB Toys and Circuit City in the graveyard of American retail? Unease about the economy clearly was part of the reason for the intense interest in the fate of Filene’s. Still, much of the buzz owed to the simple affection generations of shoppers have felt for this quirky chain, founded in Boston in 1909. “Filene’s Basement is an iconic brand that goes back a long way,” Cohen explains. “We had a lot of people interested in Filene’s, but they were pursuing very different structures. We were able to create an open, fluid, and active process that kept everyone at the negotiating table until the very end. Equally important, we were able to persuade everyone — bidders, creditors, professionals — to leave their egos at the door.”

This sense of participating in a shared mission was one of many wrinkles that made the Filene’s Basement case memorable, says Laura Davis Jones, debtors’ counsel and managing partner of the Delaware office of Pachulski Stang Ziehl & Jones. “It made it different in the sense that, all the way around, it was constructive,” she says. “Everybody carefully guarded their positions and was an advocate, but we all had the same goal in mind. That was to see if we could save the Filene’s name and maximize the value for it.”

Especially given the litany of costly, contentious and ultimately unsuccessful retailer bankruptcies over the past few years, the results of those efforts were noteworthy as well. In a §363 sale completed less than two months after the bankruptcy filing, an affiliate of New Jersey-based off-price retailer Syms Corp. acquired the trade name, leases and other assets of Filene’s Basement from the liquidating estate for approximately $64 million. Intensive marketing efforts by Abacus and several days of aggressive bidding involving Men’s Wearhouse, Syms and the stalking-horse bidder, an affiliate of Crown Acquisitions, fueled that high price.

Likewise, professional and legal fees were kept low thanks to a willingness to compromise that was visible among all of the parties in the case, including the retailer’s former parent company, Retail Ventures Inc. (RVI), notes Terrence Corrigan, managing director of Abacus. “There were a host of intercompany issues that needed to be addressed in some form or another,” he says. “By getting those issues out on the table early, we were able to conduct the process of marketing the company and holding the actual sale in a much more orderly fashion — and to completely avoid litigation.”

Thus far, a total of $41 million has been paid to creditors. Unsecured creditors have already been paid 50% of their allowed claims, and Abacus expects that 75% or more of those claims will eventually be paid. Meanwhile, secured creditors have been paid in full, and holders of priority and convenience-class claims have received 100% of their allowed claims. Given the travails of retail amid the so-called Great Recession, those results were gratifying indeed to the creditors, says Kenneth A. Simon, financial advisor for the creditors’ committee and a managing director of Loughlin Meghji + Co. “If you’re a creditor, with all of the retailers that have gone out of business, imagine how good you feel,” he says. “You are going to get a significant recovery. Unlike what happens in many cases today, you have the opportunity to continue to ship your product to the stores and make your normal margins in the ordinary course of business. That is a grand-slam homerun.”

There was no assurance that the case would be a resounding success. Mindful of the fact that Filene’s Basement had quietly been on the market for almost a year, Jones was guardedly optimistic going into the negotiations. After all, Filene’s Basement had some great store leases, considerable cachet and a discount focus at a time when shoppers were obsessed with value. Still, little interest had been expressed by potential purchasers before Cohen was hired as chief restructuring officer, and the robust bidding came as a pleasant surprise. “Everybody thought we would have a good result,” Jones notes. “But nobody thought we’d have a great result.”

Brought on as chief restructuring officer by RVI in March 2009, Cohen immediately began pursuing options for the troubled chain. In early May, Filene’s Basement filed to reorganize under Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware, with a Crown affiliate as the stalking-horse bidder and an agreement with the company’s lenders to provide limited financing.

In his role as CRO, Cohen helped keep the subsequent auction and bankruptcy negotiations running smoothly by taking an above-board approach that encouraged consensus-building rather than chest-thumping. A tough-talking native of the Bronx, who is known for urging people to “cut to the chase,” Cohen might seem an unlikely candidate for peacemaker. With nearly 30 years in the business, however, he has a deft touch that became abundantly clear during the auction, says Lawrence Gottlieb, creditors’ counsel and a partner at Cooley Godward Kronish, where he chairs the bankruptcy and restructuring practice. “Alan ran a very good auction, and I give him a lot of credit for what happened,” Gottlieb says. “If you are sophisticated and smart, you can run an auction better than someone who is not. If you know the issues, know what makes retailers tick and understand what is important to the bidders, you’re going to do a lot better. It is not a science — there is a real talent to running an auction. There’s just no question in my mind.”

Cohen was by no means the only veteran player involved in the Filene’s restructuring. The company was also advised by Perry Mandarino, the leader of the Restructuring and Recovery group at PricewaterhouseCoopers LLC. Indeed, the average experience-level of participants in this case was quite high, Jones says. While Cohen, Corrigan, Mandarino, Simon, Gottlieb and Jones all have decades of experience in bankruptcy negotiations, for example, other key stakeholders in the case — such as the representatives of some of the vendors as well as a major Filene’s landlord — were old hands, too. “You had the benefit of all these years of experience, plus you had the teamwork,” Simon says. “That does not always happen.”

And make no mistake about it, Simon says, there were real challenges in this case that might have turned into stumbling blocks. Among them was the time pressures created by the bankruptcy amendments of 2005. “Once you file for bankruptcy, you have 210 days where you must assume or reject your real estate leases,” Simon says. “And what actually happens is, at approximately 100 days, absent a bona fide going-concern offer, there’s usually going to be a liquidation sale, because you need the remaining time to liquidate that inventory.” Taking a leap of faith and assuming those leases without having worked out an agreed-upon plan is simply not an option,” Simon adds. “If it doesn’t work out, you’re going to be on the hook for a lot of money,” he says. “That is why we see so many liquidations today when retailers file — once they get to that timeline, it is over.”

In the Filene’s case, however, Gottlieb convened an ad-hoc committee of unsecured creditors about a month prior to the actual bankruptcy filing and immediately began discussions with Cohen and Abacus. “That was one of the key reasons this case had enough time to be successful,” Simon says. “If you can work out of court and prevent that timeline from starting, you can give your qualified legal and financial advisors the opportunity to explore restructuring alternatives.”

Extra time is particularly important because bidders are well aware of the leverage they gain once that 210-day clock starts ticking. “Everyone knows that once it is in court, all they have to do is sit back and wait,” Simon explains. By landing Crown Acquisitions as the stalking-horse bidder while the case was still in preprocess, Abacus set the stage for a good auction, he says. “When you’re looking for a stalking-horse bidder [prior to the filing], the potential buyer cannot say, ‘Well, you’re in bankruptcy, so I will just wait,’” Simon says. “In this case, they were told that if they wanted the opportunity to buy this business as a going concern, they have to come up with real value and make a competitive bid.”

Additional challenges included the liquidity crisis in the banking industry, as well as the doom-and-gloom atmosphere that continues to pervade much of American retail, both of which ramped up the pressure on Cohen and Corrigan. “Secured creditors and lenders generally, in order to liquefy, want you to go on the fastest path to get their money back,” Cohen notes. “The fastest path generally is liquidation: ‘Get rid of this asset, get rid of that asset.’”

Abacus, however, refused to settle for liquidation value and succeeded in convincing the bank to continue to fund operations. “The bank clearly was not willing to wait for a plan of reorganization, but they also did not immediately shut off the company,” Corrigan says. “There were offers in place that we could have accepted on day one of the filing, and the bank would have been paid off. But the rest of the creditors would have gotten very little in the grand scheme of things.”

Securing this room to maneuver was no small accomplishment for Abacus, Simon adds. “The retailer was running out of money and had the usual liquidity challenges and constraints,” he says. “By working with the lender and managing the inventory levels properly, Abacus could find competing bidders. That’s the key, because once you have competing bidders you find out how much somebody is really willing to pay for the company.”

A year before the bankruptcy filing, a team hired by RVI had been unable to find a buyer for Filene’s. Abacus, however, saw good potential fits in Men’s Wearhouse, which expressed interest in some of the retailer’s best leases, and Syms, which was looking to beef up its brand by adding discount women’s wear to its merchandise mix. As the stalking-horse bidder, Crown initially agreed to purchase 17 of the chain’s 25 stores, including the flagships in Boston and Union Square. The role of Vornado Realty Trust was particularly interesting in this case, Simon adds. The big real estate investment trust owned Downtown Crossing in Boston, where Filene’s flagship location has been closed pending completion of a long-delayed redevelopment of the site. “Syms eventually was able to partner up with Vornado because Vornado was focused on protecting its real estate interests and ultimately contributed about $25 million to the deal,” he explains.

Like Jones, Simon was struck by the sense of fairness that marked the bankruptcy negotiations. By offering a clear plan upfront — and not delaying discussions about potentially divisive issues — Cohen created an atmosphere that made it easier for both creditors’ and debtors’ representatives to show flexibility, Simon says. According to Corrigan, the intercompany issues between RVI and Filene’s, in particular, might have blown up if handled unskillfully. “On the pension piece, for example, RVI had a potential exposure that we were able to manage,” Corrigan notes. “Eventually, RVI agreed to assume the pension plan, and it was transferred from Filene’s Basement to RVI.”

As a result, Abacus forestalled statutory penalties that might otherwise have been imposed by the Pension Benefit Guaranty Corp. (PBGC). “Ultimately, the PBGC was persuaded to withdraw its claims in the case, which amounted to a very big number — somewhere along the lines of $17 million to $20 million,” Corrigan says. “In addition, if RVI had not agreed to compromise its claims, expensive and time-consuming litigation would have ensued. If the court determined that RVI’s claims were valid, it would have translated into a dramatic dilution in the recovery to the creditors.”

The big takeaway from this case, according to Jones, is the value of being a forceful advocate for clients’ interests, but without being antagonistic or negative. That was certainly Cohen’s attitude as he sought to maximize value for all parties in the case, Simon says. However, there is a difference between evenhandedness and passivity — one can be aggressive in negotiations, in other words, without making a chest-pounding display. “During the auction, we were all sitting at the conference table and I said to Alan, ‘We are in a good place — a very good place,’” Simon recalls. “He looked at me and said, ‘I think we can do better. Come with me.’ Alan takes me into the room with one of the bidders and says, ‘Alright. This is what it’s going to take.’ He wasn’t ready to settle. Credit to Alan Cohen — he got us a larger recovery. To this day, if I have lunch with him, I will look at him and jokingly say, ‘I think we can do better.’ ”

After all, doing better at every stage of the game is what the CRO’s job is all about, and it can make a real difference in such cases for debtors and creditors alike. “The dividend that was secured here was very good,” Jones says. “But on the debtor’s side, we were able to keep the brand name. We were able to keep jobs. We eliminated an awful lot of potential claims. This was just a very positive deal.”

Joel Groover, a freelance writer based in Marietta, GA, regularly writes about the retailing and retail real estate industries.