Monday, August 11, 2008

About bankruptcy

The recent bankruptcies of (among others) Steve & Barry's, Mervyn's, and Boscovs has brought to light something of which I was unaware (or at least had given little thought to). The changes in bankruptcy law a few years ago, which at the time were discussed mostly in terms of their effect on consumers, are having an impact on the way retail and other commercial bankruptcies play out. This article in BusinessWeek explains some of the ways in which the law has changed, and how it impacts retailers.

File for bankruptcy, and the pressure now intensifies enormously. Prior to 2005, debtors had 60 days from filing for Chapter 11 to assume or reject a lease. Most of the time, bankruptcy courts would grant repeated extensions that lasted two years or more. Bankruptcy experts argue that gift of time was crucial: They say it takes a minimum of two Christmas cycles before a retailer is ready to put its finances in order and see if its reorganization plan is working.

But mall owners don't like to house bankrupt retailers. An extended, court-run reorganization can hurt the landlord's chance of securing positive financing terms. The real estate industry lobbied successfully for the 210-day cap on how long companies have to assume or reject leases. "Macy's got at least two Christmas seasons, but today if a company files in January, they don't even have until Christmas to decide what they will do," says lawyer Gottlieb.

Other changes require cash deposits to utilities, give priority status to claims from vendors who shipped within twenty days of the filing, and put a limit of 18 months on filing a restructuring plan. These terms will make it more difficult for some of the bankrupt retailers to restructure.
"Stores immediately lose working capital," says Harvey Miller, a partner and bankruptcy specialist at New York law firm Weil Gotschal. He worked with Macy's in the past and has recently worked with several retailers including Goody's Family Clothing, a 355-store chain that operates in 20 states and filed for bankruptcy on June 9. Miller says Macy's reorganization, which took four years, wouldn't have been possible under the new setup.

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