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Oct 6, 2017
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Bankrupt U.S. retailers begin to catch a break

Oct 6, 2017

An unexpected helping hand from creditors, landlords and vendors is allowing more U.S. retailers to stay in business following bankruptcy with most of their stores and employees in the fold.

The new approach marks a turning point for the beleaguered sector, which has seen at least 19 brick-and-mortar retail chains shut down the bulk of their operations since 2014.

FILE PHOTO: An American Apparel store logo is pictured on a building along the Lincoln Road Mall in Miami Beach, Florida, U.S. on March 17, 2016. REUTERS/Carlo Allegri/File Photo

Until this year, most bankrupt retailers, including American Apparel, Sports Authority and The Limited, were dismantled during their bankruptcy process. Investors and companies acquired their intellectual property and other assets, but refused to take on their business as a going concern because they saw little value in assuming costly store leases. Instead, they often opted to revamp some of the battered brands online.

However, several creditors, landlords and vendors now see more value left in some retailers, and are seizing on an opportunity to minimize their own losses in the retail rout.

This could spell a slowdown in the decline in brick-and-mortar retail jobs, which fell by more than 100,000 this year, as more than 6,000 stores shuttered under increasing pressure from competition among traditional retailers as well as e-commerce firms such as Amazon.com Inc.

“We’re seeing a set of situations come together in which the constituencies have more interest in the retailer surviving than not,” said Holly Etlin, a managing director at AlixPartners LLP, a consulting firm that worked on the bankruptcy of Gymboree.

Jeans company True Religion Apparel Inc and perfume wholesaler and retailer Perfumania Holdings Inc PERF.O are set to emerge from bankruptcy with at least some of their stores in operation, according to interviews with bankruptcy attorneys and a Reuters review of financial information of more than 15 retailers shared with bankruptcy courts.

These chains will follow a path blazed by Payless ShoeSource, which in August emerged from bankruptcy while keeping more than 3,400 out of its 4,200 stores worldwide, and preserving 19,000 of its 22,000 employees.

Last month, teen clothing shop rue21 Inc and children’s apparel chain Gymboree Corp came out of bankruptcy in similar fashion, preserving much of their store footprints and employee headcount.

Most of these retailers were owned by private equity firms, which saddled them with debt in a risky bid to juice returns. But in bankruptcy talks, the chains are arguing successfully that they can generate enough cash to withstand the sector’s woes if their debt mountains are slashed and payment obligations eased.

Creditors, landlords and vendors are more receptive to this approach, because their own financial projections show that liquidations would result in a limited recovery of what they are owed, according to interviews with debt investors and bankruptcy court filings.

Had rue21 liquidated, for example, many loan holders would have seen almost the entire value of their investment wiped out by the end of its five-month bankruptcy process, according to bankruptcy court filings and people familiar with the matter.

This new reality offers grounds for optimism for Toys “R” Us Inc, which last month became the largest retail bankruptcy in 13 years. The biggest U.S. speciality toy retailer plans to emerge from Chapter 11 bankruptcy with many of its about 1,600 stores, employing 64,000 people, remaining open.

Toys “R” Us plans to argue that its annual cash flow of roughly $800 million would make it viable if its $5.2 billion in debt is significantly reduced, according to court papers and people familiar with the matter.


If a retailer’s brand is strong enough and its operations can be improved, creditors see greater value in forgiving some of their debt in exchange for equity stakes, rather than recouping pennies on the dollar in a liquidation.

David Tawil, president at distressed-focused hedge fund Maglan Capital, said it makes sense for creditors to extend new money, often at high interest rates, in exchange for a fully restructured balance sheet and a better business plan.

“Otherwise, there may be a very, very steep haircut (in the value of the debt) to be taken upon a liquidation,” Tawil said.

For example, a group of Gymboree investors, including distressed debt-oriented hedge fund Brigade Capital Management LP and buyout firm Searchlight Capital Partners LP, agreed to keep it in business by writing off most of their term loan and investing another $95 million, in exchange for equity ownership, court filings showed.

Gymboree and Brigade declined to comment.

“There is always risk taking (the company) through bankruptcy, but we believed that it was a better path with more upside versus liquidating, where the recovery is pretty minimal and you forego any upside opportunities,” said Searchlight partner Eric Sondag. He added that Gymboree’s strong brand was a key consideration in Searchlight deciding to back it.

Many landlords that rent out store space are also willing to provide relief rather than seeking another tenant amid a glut of unused mall space. Rue21’s landlords granted rent reductions of about 20 percent on its remaining 758 stores, according to a person who asked not be identified because the terms of the lease deals are not public.


Supplier support is also critical. Vendors can offer longer payment terms, helping retailers free up working capital to operate. They are often promised full repayment on their claims in return.

Hong Kong-based Li & Fung Ltd, a supply chain manager that helps retailers work with apparel and accessories makers, gave Gymboree a 75-day repayment period in exchange for full payment on its claims in the bankruptcy, people familiar with the matter said.

Before Gymboree filed for bankruptcy, the retailer also extended Li & Fung a $20 million secured claim, helping keep merchandise flowing to its stores, the sources added. Li & Fung declined to comment.

Toys “R” Us has also fought to keep suppliers onboard, accelerating its plan to file for bankruptcy to be able to pay them. It has been making progress in winning back vendors who curbed shipments over payment fears.

“We believe (in Toys ‘R’ Us)... they are a good channel and important to the toy industry,” said Michael Araten, chief executive of K‘Nex Limited Partnership Group, a toymaker that is now negotiating new shipment terms.

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