What If My Favorite Retailer Files Chapter 11?

30 Dec What If My Favorite Retailer Files Chapter 11?

With holiday sales down for most retailers, the media is full of reports of possible Chapter 11 filings, or even liquidations.  So what happens with those Chapter 11 reorganizations, and why not just liquidate?

There are many possible benefits for any business, whether a big box, or a mom-and-pop store. Debt, including payments to be made to creditors or shareholders, can be delayed until finances improve.  Debt can also be restructured, reduced, or otherwise re-worked.  Leases may be rejected, allowing retailers to close less profitable location and retain those that are more favorable.  Naturally all these actions may have consequences, but in the right combination or at the right time, can allow a business to survive a downturn.

There are also potential pitfalls for a company considering a Chapter 11.  One such is meeting the business’ immediate cash needs.  Many companies that are partially or fully leveraged (or even over-leveraged) need what is called post-petition financing in order to have any chance at reorganization.  This is a loan (or more usually a line of credit) that is borrowed after the case is filed, and must be approved by the bankruptcy court.  Of course, right now the real challenge is to find a lender to provide that financing in the first place.

So, while a Chapter 11 can strip off debt and allow a business to liquidate non-performing assets in an orderly way, it is by no means a sure thing, and the success of the reorganization often revolves around the preparation before filing and the ability of management to negotiate additional loans.  But it’s not all bad news.

Retail bankruptcies may help the industry in the long run, according to Flickinger.

“We’ll be going from a Dickens-esque worst of times this December to the best of times in future Decembers because we’ll rationalize out all the redundant retailers and retail space in shopping centers,” Flickinger said.

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