Exiting Bankruptcy

A number of retailers that filed for Chapter 11 bankruptcy in the early months of the COVID-19 crisis are now at the finish line or close. To get here, retailers sought financing while facing the risks that come with months-long store closures, then reopened stores during the ongoing pandemic and struck deals with creditors, lenders, and in some cases, buyers.

In August, Brooks Brothers won approval from a Delaware bankruptcy court for a going-concern sale to SPARC Group, the venture of licensing company Authentic Brands Group and mall operator Simon Property Group. J. Crew Group Inc. also executed its reorganization plan to convert some $1.6 billion in debt to equity, and expects to emerge from bankruptcy next month. Neiman Marcus Group is looking ahead to its own reorganization plan confirmation hearing on Sept. 4, while J.C. Penney Co. Inc. has told the court it is negotiating with lenders and potential third-party investors to execute a going-concern sale.

To cope with plummeting consumer spending while their own debts came due, bankrupt retailers trying to survive the process often looked to contingencies like temporarily deferring rent payments, and worked out agreements with lenders and others in order to survive.

While the proceedings so far have shown courts willing to accommodate retailers’ requests and defer to their business judgment, there are still questions of long-term survival, bankruptcy attorneys said.

“I think there’s going to be a tendency to approve things that may be less likely to be approved in a more healthy market environment,” said Zev Shechtman, partner at Danning Gill Israel & Krasnoff LLP, speaking generally.

“But in order to exit from bankruptcy, companies need to have a viable business plan going forward,” he said. “The question is, where is the money coming from on a going-forward basis?”

Some retailers sought to maximize their odds of survival from the start by planning for as short a stay in bankruptcy court as possible. J. Crew and Neiman Marcus both entered their Chapter 11 proceedings in May with plans they had already negotiated with lenders to slash debt and emerge from bankruptcy with enough financing.

“That provides a lot of certainty, that allows them to make plans, to make projections, to get exit financing,” said Patrick Collins, bankruptcy and restructuring partner at Farrell Fritz P.C., speaking generally. “And it allows them to go through the process with a degree of confidence.”

The confirmation of J. Crew’s plan now gives it a few weeks to complete the transactions described in it in order for the reorganization to take effect.

Meanwhile, Penney’s has told the Texas bankruptcy court overseeing the case that it plans to execute a going-concern sale and has no intention to liquidate. But the retailer has moved past earlier deadlines in the case to propose a buyer group for its reorganized business, and has told the court it is still negotiating.

“What they look like coming out, I think at this point, is anybody’s guess,” said Brian Davidoff, who chairs the bankruptcy, reorganization and capital recovery practice at Greenberg Glusker Fields Claman & Machtinger LLP, who is not involved and spoke generally.

Ultimately, the story of retailers in bankruptcy is also one of the broader economy, and its recovery while the pandemic continues, attorneys said.

“Bankruptcies can be really successful for reorganizations when there is an exit, a light at the end of the tunnel,” said Shechtman of Danning Gill.

“The bankruptcy story will be mirroring the general economic story in many ways,” he said. “If there is no end in sight for the economy, bankruptcy is not a silver bullet.”

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