Appeal of retail bankruptcies to investors


The bankruptcies of major brands – including Barneys New York, JC Penney, Brooks Brothers and others – highlight one feature of the bankruptcy process that is likely to attract more investors as retailers find themselves in court: the sale of bankruptcy.

Bankruptcy court, although an expensive place for retailers, can be an attractive site for investors looking to purchase valuable assets, including a former retailer’s brand and other intellectual property, as well. that its reorganized lease portfolio and online business, bankruptcy experts noted. .

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The recent wave of retail The bankruptcies attracted investors who saw opportunities and at times formed alliances, including licensing firm Authentic Brands Group, financial services firm B. Riley Financial and owners Simon Property Group and Brookfield, among others.

While bankruptcy lawyers anticipate more bankruptcy filings in the year following the current lull, they expect companies looking to acquire brands to likely consider getting involved in the lull. retail bankruptcies as part of their acquisition strategy.

“Definitely for investors who want to buy troubled assets, you get assets with no liability [in a bankruptcy]”said Patrick Collins of Farrell Fritz PC, referring to the ability of retailers to use Chapter 11 procedures to get rid of their responsibilities, including liens and debts.

“You can ask the target business to get rid of unprofitable locations and the like,” he said. “The new paradigm in some of these retail cases is actually just getting the [intellectual property], not even brick and mortar, which gives you a lot of freedom, without the infrastructure and all the costs that go with it, to reinvent the brand.

In bankruptcy proceedings, potential buyers also have the opportunity to play several roles in the process, acting as debtors to help fund the bankruptcy, and then continuing the process with an offer to purchase assets. . During the Brooks Brothers bankruptcy last year, for example, ABG and Simon entered the fray with a DIP loan, followed by SPARC Group, a joint venture of ABG-Simon Property Group buy out the business in the event of bankruptcy.

The bankruptcy process also creates avenues for secured lenders to become homeowners, including using a tool called an offer of credit. An offer of credit allows a secured lender to use the value of the loan it holds in the business for its offer to purchase its assets at a later date, even if it has purchased the loan at a reduced price itself. One element of the JC Penney sale process involved an offer of credit by a group of senior senior creditors, which led to a dispute with a rival faction of lenders that was ultimately resolved.

“This is why it is very difficult in these situations for competing bidders to compete with the credit supply,” Collins said. “A credit bidder has this advantage over others who have to use their own money from a dollar.”

The bankruptcy process is also attractive to investors looking to purchase retail assets with improved leases, as bankruptcy proceedings can facilitate lease renegotiations for rent reductions as well as changes to the structure of the leases. leases, the lawyers said.

During a bankruptcy proceeding, retailers with a strong presence in the malls they negotiate with may be in a good position to negotiate more favorable lease structures that allow them to pay rent as a percentage of their income rather than as an amount. fixed.

“What we saw during [the pandemic] is that when the lease portfolio can be restructured, it can create more value, ”said Bradford J. Sandler, who co-chairs the creditor committee practice at Pachulski Stang Ziehl & Jones. “[It helps] companies take what is a fixed cost and make it a variable cost linked to their activity, [and] this reduces their risk profile.


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