Why Some Retailers Are Reborn

When it comes to retail debtors that successfully reorganized and those that liquidated, FTI’s analysis showed that pre-filing financial ratios and metrics between the two groups were surprisingly similar. Key measures of operating profitability and leverage in the three years preceding bankruptcy were essentially the same and offered few clues that distinguished between survivors and goners. Outside of retail, financial metrics differ significantly between the two groups.

Most likely qualitative factors, such as the debtor’s level of preparation in advance of a filing, played an important role in the fate of retail debtors that FTI analyzed.

One significant factor involves the relationship of a retailer with its constituent trade suppliers. The suppliers’ ability to stop the flow of merchandise or suddenly tighten credit terms is often the straw that breaks the back of a troubled retailer and can be the proximate cause of a chapter 11 filing. Winning back the support of the supplier community can be a major challenge for a reorganizing retailer intent on emerging as a stronger business.

Landlords, too, are uniquely important in reorganizing efforts for a retailer. Unlike other debt obligations where financial relief for a debtor can be imposed on creditors in a chapter 11 proceeding, financial obligations attached to assumed store leases survive intact — unless a landlord agrees to provide more favorable lease terms.

The importance of having a plan going into the filing is critical because debtor-in-possession (DIP) lenders to chapter 11 retailers are tightening their terms. DIP lenders are providing shorter time frames, less new money, and more aggressive milestones in their financing agreements; any missteps or delays in moving towards a successful exit can prove fatal.

Overall, the size, scale, goodwill and reputation of a retailer in chapter 11 within its industry play a large role in its opportunity to emerge. So too does the ability of its senior executive team to marshal cooperation with key parties in interest who can greatly influence its negotiating strength, its outcomes with these critical creditor constituents and, ultimately, its fate.