The trend of liquidation, rather than reorganization, for large retail debtors is likely to continue, according to an article in the October ABI Journal.
“It has become an accepted storyline that troubled retail chains, more than other industry sectors, face an uphill battle to successfully reorganize absent a near-consensual RSA or plan among key creditor classes upon a Chapter 11 filing and/or an accelerated auction process,” report Chuck Carroll and John Yozzo of FTI Consulting in their article, “Why Are U.S. Retail Reorganizations So Hard?”
Carroll and Yozzo examined S&P Capital IQ’s bankruptcy database for Chapter 11 filings that occurred between January 1, 2000, and June 30, 2016, where a debtor had at least $100 million in debt or assets at the time of filing to measure the degree to which failed retailers liquidate more frequently than other filers.
Carroll and Yozzo uncovered other factors that have led to large retail liquidations:
- Liquidation values for failed retailers have improved markedly over the last decade or so, making it harder for opportunistic going-concern buyers to prevail in an auction process.
- Bids from liquidators often guarantee that a debtor will nearly or fully recover the cost value of its inventory.
- Lease obligations also present a daunting challenge for retailers hoping to reorganize, as they typically represent sizeable financial commitments that cannot be expunged in bankruptcy in the same manner that funded debt often is.
- Debtor-in-possession lenders to retailers in Chapter 11 are providing shorter time frames, less new money and more aggressive event milestones in their financing agreements than they did in the pre-recession era.
“Unfortunately, the harsh reality that the American retail landscape is overstored seems to have finally set in as the online channel continues to take sales and market shares from traditional stores,” Carroll and Yozzo said.
To obtain a copy of the entire article, contact ABI Public Affairs Manager John Hartgen at [email protected].