Kramer Levin Naftalis & Frankel and Debtwire recently co-sponsored a retail restructuring discussion that brought together a formidable roster of retail restructuring experts to discuss opportunities and strategies for preserving and unlocking the value of distressed retail assets. The panel, which was moderated by Debtwire senior legal content specialist Richard M. Goldman, featured Kramer Levin partners Adam C. Rogoff and Erica D. Klein, Berkeley Research Group managing director Steve Coulombe, Gordon Brothers managing director Becky Goldfarb, Keen-Summit Capital Partners managing director Matthew Bordwin, and Consensus Advisors managing member Michael A. O’Hara. Mr. O’Hara also delivered the keynote address preceding the panel, where he examined the current state of the distressed retail market, factors weighing against typical brick-and-mortar retailers, and efforts being taken by various retailers to keep up with the changing tide.
The panel opened with a discussion of the fundamental shift in the paths taken by today’s distressed retailers. Whereas previous years of retail restructurings saw waves of section 363 sales, the panel pointed to the recent Chapter 11 filings of Payless, rue21 and Gymboree as evidence that retailers can accomplish garden variety balance sheet and operational restructurings previously seen outside the retail sector. Mr. Coulombe noted this paradigmatic transformation is likely due, at least in part, to the diminished role of private equity firms, who previously had often provided rescue financing in connection with going concern sales of distressed retailers. As a result of this shift, retail reorganization efforts must now look to and rely upon parties already in a company’s capital structure, often equitizing unsecured debt as part of restructuring transactions.
The panelists stressed the importance for retailers of creating a business plan in order to accomplish such reorganization efforts, taking steps to right-size the company’s brick-and-mortar footprint, identify the market need that the company fulfills, and establish a viable business model going forward. A proper business plan, the speakers advised, not only forms the framework for a restructuring, but is also instrumental in negotiating with key parties not part of the company’s capital structure, namely vendors and landlords.
The panelists stressed the importance of maintaining positive relationships with vendors and taking steps to stabilize those relationships—especially with those vendors who begin producing inventory months in advance of delivery to the retailer. As Ms. Goldfarb put it, the key asset for any retailer is its inventory. If inventory is not there when you need it to be there, then a company can get into trouble very quickly. This concern is particularly significant for “fast fashion” retailers, who have high inventory turnover. Ms. Goldfarb and Mr. Rogoff strongly cautioned against retailers’ efforts to “self-liquidate,” or orchestrate sales at significant markdowns. Such self-liquidation sales often occur at prices below appraisal value, threatening lender recoveries.
The panelists also focused on the importance of negotiating concessions from landlords, who, as Mr. Bordwin and Mr. Rogoff put it, in the course of determining whether to grant real estate concessions are effectively making a decision about whether they want to invest in the reorganized company. Aéropostale’s landlords recently made such an investment, proving critical to the company’s reorganization.
To the extent, however, that negotiations fail and downsizings take place, the panelists were quick to point out that such events should not necessarily be viewed as a disaster. Instead, Ms. Klein said, retailers should consider how to leverage their online platforms and intellectual property portfolios to extract new value. Ms. Klein examined J. Crew’s recent IP transfer from its core credit group to an unrestricted subsidiary in an effort to support a note exchange, noting that if this move proves successful, other retailers may follow a similar approach.
The panelists agreed that there are and will continue to be numerous opportunities to invest in the retail sector. Retailers and investors should be aware of market trends and begin a dialogue now to plan a business strategy going forward.