What happens when a retailer goes bankrupt?

Just when it looked like the so-called retail apocalypse was completely in the rearview mirror, she managed to take another victim. A long besieged Sears Fund (SHLDQ, $ 0.40) was finally forced to file for Chapter 11 bankruptcy protection on October 15, 2018. This vindicated many skeptics who were surprised that Sears was hanging on for so long. .

But the decision is hardly an event. That is, the decision to file for bankruptcy triggers a chain of open processes that could be able let the company come together on more solid foundations.

Retail bankruptcies like Sears’ are unique in that they ultimately attempt to stay operational during the restructuring process. This is because restarting such a business can often be much more expensive and difficult than just keeping them going … even if the operation is bleeding money as it is.

Here are 10 steps most bankrupt retailers – including Sears – will typically take once it’s clear they can’t get out of insolvency. The sequence of events is not necessarily set in stone, but much of it must unfold in a manner close to this order.

1 in 10

Choose chapter 7 or chapter 11

Before reaching a resolution, the organization in question must answer a crucial question:

Is it time to stop it for good, or can the business become viable again if a large part of its obligations are canceled?

If so, Chapter Seven of the U.S. Bankruptcy Code lays the groundwork for an outright liquidation of all company assets, as well as a fair distribution of all funds that may be raised. If it is the latter, the company follows the rules according to Chapter 11, which facilitate negotiations to reduce legal obligations.

Most retail bankruptcies are Chapter 11 filings because the end goal is to get back into business with at least less debt.

2 out of 10

A trustee is appointed

Once a business decides that it cannot continue to operate as is and asks the country’s legal system to intervene, it is no longer allowed to operate without close supervision. The courts assign a US trustee to the case to ensure the organization is operating above the board during a turbulent time that could lead to insider abuse and selfish rulings.

In the case of Chapter 7 filings, an impartial and disinterested third party is appointed as the case administrator, to fairly and fully liquidate the assets. File trustees are much less common in Chapter 11 filings, in large part because the company and the creditors all want the same thing and will generally work together to rekindle viability.

In either case, however, the court-appointed US administrator is responsible for overseeing the process, including the appointment of a third-party administrator.

3 out of 10

Clearance sales initiated

In cases where a retailer will close at least some stores, all that inventory has to go somewhere.

The easiest and most profitable solution is to just sell it where it is, even if that means selling it for a lower price. Most organizations just don’t have the space or the capacity to redistribute all of this merchandise.

However, the stores must be emptied.

4 out of 10

Closure of stores, start of layoffs

The next step in the process is obvious and painful. If a retail site is permanently closed, all of those workers are laid off if they cannot be relocated. And most cannot be moved.

They are generally eligible for unemployment benefits, although this is neither a permanent nor an adequate solution. In some cases, employees may also receive severance pay. However, if an organization has been striving to generate profits for years, it may have little or nothing to offer the workers it has to lay off.

5 out of 10

Real estate liquidations begin

All businesses have minimal equipment and furniture necessary for their operation, including retailers. But retailers also have a type of equipment that can become a huge headache once it’s no longer needed: shelves, racks, and displays.

There is little or no market for such properties, especially when in use and difficult to transport. Much of it ends up being taken to a landfill or sold for pennies on a dollar to specialists who handle second-hand devices.

The buildings themselves are either returned to the owner or, when owned, sold to the highest bidder. In today’s saturated business environments, commercial real estate doesn’t have much value except in places that are still very busy.

Ivan Friedman, director of RCS Real Estate Advisors, recently told Business of Fashion: “Everyone is closing stores… everyone gets lower rents when they do their renewals.

6 out of 10

The pension guarantor begins the payments

Although increasingly rare, some long-term retailers still offer employee pensions. Sears is – or has been, anyway – one of them. In fact, it was the company’s relatively high pension expenses that helped drive the company into its new Chapter 11 bankruptcy.

In these rare cases, retirees are not unlucky. Almost all pensions pay for what is essentially insurance offered by a pension guarantor, who becomes responsible for ensuring that pension payments continue to be made if the company in question no longer has the means to afford it. To do.

This will almost certainly be the case with Sears, which has paid Pension Benefit Guaranty Corp for years. this type of protection. PBGC said in a statement regarding Sears’ Chapter 11 decision: “If circumstances require, we are ready to step in and provide benefits guaranteed by PBGC.”

7 out of 10

Creditors paid, in order of seniority

Selling store inventory and office equipment doesn’t make a big dent in what is owed to the bondholders and lenders of a bankrupt retailer, but every move counts. The bulk of all salvage funding, however, comes from the sale of real estate and outright savings.

Payroll is often a retailer’s biggest operating expense, but if there are no employees (or other bills) to pay, the savings can be significant. Even a disappointing selling price for a storefront can still run into the millions of dollars.

However, in the case of Chapter 7 bankruptcies, it is not just a matter of distributing the accumulated money. There are different degrees of loans given to a business. Some may be backed by guarantees, while others are unsecured. The bankruptcy court determines what is fairer in light of an organization’s unique debt structure. However, each creditor usually ends up losing money in one way or another.

Chapter 11 repositories work more or less the same way. But in most cases where the business intends to continue operating, bondholders accept a reduced repayment and / or adjust the value of their debt holdings to a level that a struggling business can afford. allow to cover.

8 out of 10

Compelling recovery strategy in place

This is perhaps the most critical part of the Chapter 11 process: rebuilding the business so that the business doesn’t end up in a sea of ​​insolvency a few years later.

Most bankruptcies virtually require not just a replacement of management, but a whole new approach to doing business. Investors have already been burned, whether bond or shareholders. If the restructured business looks, feels and acts too much like the old one, no one is going to join.

Too many backers and investors remember that Toys R Us, RadioShack, and Brookstone are just a handful of names in the business that have been forced to file for bankruptcy twice (almost consecutively) because the plan to turnaround was never really solid.

9 out of 10

Vendors and owners begged

A retailer must convince more than potential shareholders and bond buyers that he is completely out of the question. Owners and vendors of merchandise who ended up losing money with a previous iteration of an organization may be hesitant to partner with the new version after getting burned.

As evidence of this growing trend, Bloomberg reported in July: “Many homeowners in America are pushing to eliminate or narrow escape clauses following massive department store closings, resulting in less flexibility for remaining tenants.

Distressed businesses that intend to rebuild, however, must be patient and methodical, as they need real estate and goods more than sellers and landlords. But they don’t all have the luxury of time.

10 of 10

Shareholders get the leftovers

Own equity in a business – any business – is risky, but the potential rewards are up to the mark. This is where the most significant growth can occur for an investor.

But like any property, investors are the last to face bankruptcy.

For Chapter 7 deposits, this effectively means that there is nothing left to share. However, Chapter 11 bankruptcies are generally not easier on shareholders. Bondholders, creditors, and sellers are always paid first, and they usually settle for pennies on the dollar. Most bankruptcies completely wipe out shareholders.

Even in the rare event that a retailer’s existing shares are not canceled and new shares are issued to investors eager to provide new funding, those shares tend to remain worthless for a long time.

Again, no two bankruptcies are the same, and retail is anything but an exception to this norm. This is because Chapter 11 bankruptcies are an ever-changing target, as it is never entirely clear to what extent the company will be able to convince consumers to continue buying from that company’s stores.

However, two things are certain about restructuring or outright closing chain stores: It’s still a proverbial circus, and it’s still ugly.

About Marc Womack

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