May 05, 2020
As the coronavirus (COVID-19) pandemic and economic crisis have taken hold, it is not surprising that retailers (whether teetering prior to the pandemic or crippled as a result of state- mandated closures) are considering bankruptcy as a viable strategy for survival. We discuss steps retailers and their creditors can take to protect their respective economic interests during, and after, the pandemic.
It should come as no surprise that retailers have been experiencing financial distress over the past few years. Even when the economy was firing on all cylinders, retailers were facing rising expenses, changing consumer shopping habits, and stiff competition—leading many iconic retail brands in the U.S. and around the world into bankruptcy. As the coronavirus (COVID-19) pandemic and economic crisis have taken hold, it is not surprising that even more retailers (whether teetering prior to the pandemic or crippled as a result of state-mandated closures) are considering bankruptcy as a viable strategy for survival.
On May 3, 2020, J. Crew filed a “pre-packaged” bankruptcy in which it already reached terms with its largest creditors—71% of its term loan lenders and 78% of those holding its IPCo Notes—for a restructuring of its debt. That resulting deal would convert $1.65 billion of the company’s debt into equity. The company also announced it was changing direction and would not be spinning off its Madewell division through an IPO (Madewell, a denim-focused brand, had been out-performing the parent company). J. Crew is working on plans to reopen its stores and will keep its online business, which it claims accounts for more than 50% of operating revenue. CEO Jan Singer commented, “We look to reopen our stores as quickly and safely as possible; this comprehensive financial restructuring should enable our business and brands to thrive for years to come.” Although rumors regarding J. Crew’s inevitable filing had circulated for years, the cumulative effect of the formidable pressures on retailers along with the pandemic and economic crises proved to be too much to surmount.
Even with the breathing-spell that bankruptcy initially provides, retailers considering bankruptcy will face many critical issues, including:
The key for retailers will be significant upfront planning, even if bankruptcy becomes unavoidable. Businesses who supply or otherwise engage with retailers will need to carefully consider their options—and not just be reactive—in order to limit losses.
The fallout from the current pandemic will certainly impact all industries, but this may be the “straw that broke the camel’s back” of industries such as retail, which were already suffering enormous pressure prior to the outbreak. Careful planning by retailers and their creditors is necessary to protect their respective economic interests. Finally, private equity firms and other investors looking to expand their portfolios may be well-positioned to acquire household brand names at steeply depressed prices—offering an opportunity in an otherwise grim situation.
Our Nixon Peabody team will continue to provide updates on this and other issues facing global retailers and solutions to assist them in navigating through these turbulent times.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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