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How can these businesses avoid falling into liquidation? Are you helping any insolvent retail operat

September 2019 - Insolvency & Restructuring. Legal Developments by IR Global.

More articles by this firm.

The following article discusses session two in the IR Global Virtual Series on ' The Retail Apocalypse'.

U.S, Illinois – RF It's quite a challenge to try to revitalize a retailer that's not effectively competing in the market. The reason is, you almost always need new money, or significant restructuring. In order to accomplish that, you have to be able to show that you have a business model that can be successful.

The real challenge for most of these enterprises is on the business model side, more than the financing side. Insolvency professionals can do a lot to help people with structure and with converting debt to equity. They can release debt through formal or informal proceedings, but you must have a business operation that is profitable. The circumstances that led these businesses to difficulties in the first instance are going to repeat themselves even after a restructure, if you haven't addressed the business deficiencies.

Insolvency professionals can’t solve that problem. A business either has to downsize, or change its geographic mix or product mix. It must also figure out how to successfully and profitably implement the online side of its business. Those are the real challenges that are facing the retail industry, and I don't think it's driven by a lack of legal and financial approaches to problem-solving, rather it’s about understanding how to be successful in today's marketplace.

Landlords are pretty cognizant of the fact that empty space produces no income. There's been a glut of space given back to landlords, and they're trying to figure out what to do with it, so restructuring leases is certainly not an unrealistic thing to talk about doing. The issue is showing landlords that the real business problems are solved, in addition to fixing things on the cost and expenses side. Landlords do not want to have to address lease restructuring a second or third time.

Canada – FS Canada and the US has a lot of common landlords, private equity houses and retailers. Our markets are more or less similar.

My original example of Bombay and Bowring is a good example of a failed restructuring. We restructured those companies in 2015, which isn't so long ago. They originally had about 200 stores across Canada with unsecured debt across the world, because they had a lot of suppliers in China and Indonesia and Malaysia.

They also had a lot of lease commitments with the 15 or 20 biggest property management firms in Canada. They failed following first restructuring and part of the reason for that was because they hadn't changed their business model enough.

In 2015, they went to their banks and secured creditors, their investors and their unsecured employees and said this business is going to fail unless we get these concessions. We did a very good job of restructuring the debt, restructuring the leases, restructuring all of their legal obligations, but what the client did not do was restructure its business operations and turn it into a profitable venture.

Three years later in 2018, they had to do another restructuring because they were up against their credit line and had no more credit available to them. They were borrowing in excess of a hundred million dollars at that time just for working capital purposes.

When they tried to restructure for a second time, the landlords were not happy to deal with them and neither were the banks. There was no effective restructuring the second time around.

Both companies had also looked at private equity ownership. In Canada, we have a lot of private equity shops from the US coming into Canada and buying assets, because to the US the Canadian Dollar is still a bargain.

Companies in Canada cannot attract US investment, unless they're showing a good bottom line. Canadian retailers are still lagging behind the US, and so a lot of the US investors aren't willing to invest in failing businesses or businesses with challenges.

England – DF How do people view private equity in Canada and the US? How warm do you generally feel about private equity?

Canada – FS It depends on the industry. Our law firm has a lot of private equity clients who are investing in all kinds of businesses, whether it be landlords, property or cybersecurity.

We're not seeing a lot of investment in retail though. We’re even finding investment for manufacturers, but not so much in retail right now.

England – DF Footfall in the UK’s high streets, shopping centres and retail parks has seen its biggest reduction in six years.

Some people have been quite successful in terms of raising money, a good example being retailers that do generally one thing well rather than trying to be all things to all people. JD Sports has just joined the FTSE 100 Index on this model.

Experience-led stores have also been successful. Primark has got a 160,000 square foot Birmingham store, which has got a beauty clinic, three dining venues and mobile charging points.

Avoiding the squeezed mid-market is another strategy. Debenhams is a good example of a model where they're trying to restructure at the moment, recognising that people do combine purchasing cheap items with expensive pieces such as shoes and handbags.

The ability to respond to trends is important and a good reason why online has been successful. Online shopping is worth about 18.7 per cent of UK retail sales. I recently dealt with a teddy bear store just near us that sells as much online as they do from their shop, although the shop is important because people can go and experience the teddies there.

Next is another very interesting example in the UK. They've got 500 stores and about a fifth of their staff dealing with online returns.

In terms of methods of restructuring, we’re seeing six major strategies.

1. Stopping Production.

A good example in the UK is car production, where the number of cars currently produced is 20 per cent down on last

2. Fresh Capital

Capital for restructuring into new areas such as automation or the client experience.

3. Private Equity.

We had a bit of an issue here with British Steel where Greybull Capital took control of the company a couple of years ago for a pound and is now asking the UK government for a GBP75 million bailout. At the same time, Greybull Capital is pumping GBP42 million into a French steel works.

4. Shareholder Control.

In January the shareholders of Metro Bank found an accounting error, which left the bank without enough capital as a buffer against certain loans. Legal & General has used its power to vote against the founder Vernon Hill having more power, while also trying to ensure that the bank cuts its ties with Hill's wife, who has been paid over GBP20 million for store fit-outs.

5. Company Voluntary Arrangements.

The Arcadia group closed 50 shops closed and saw rent reductions of between 25 and 50 per cent in a whole bunch of other stores. At the same time there was the need to pump money into pension deficits.

6. Administration.

Jamie Oliver's Italian restaurant chain is a good example of a recent administration in the UK. A thousand jobs were lost with 300 more at risk. The only bit still functioning is its Gatwick Airport restaurants. Jamie Oliver put four million pounds of his own money into it as a sort of super senior status loan to be repaid before HSBC’s GBP37 million loan.

Belgium - PT We are not involved in restructuring retail businesses at present. This is a little bit unusual since we're restructuring other businesses.

The only thing we are involved in from the retail point of view are bankruptcies. We have worked with some private equity clients looking to do some bargains, but there is no interest in buying insolvent retail businesses.

We had a shop in Antwerp that went bankrupt two months ago. It was a well-known shop, in a nice location with all the high-end shoe brands. They wanted to go big time and spent EUR3 million euros on decorating some prestigious new real estate. Two months after that, they transferred to the new shop, but were not able to make the business profitable.

Just a couple of minutes after the insolvency was announced, we asked one of our other retail clients whether or not they were willing to buy this store from insolvency and they said absolutely not. There is a total disinterest from industry players and private equity place in restructuring retail companies.

One point of interest here in Antwerp at present is the diamond apocalypse. We are involved in the voluntary liquidation voluntary of a traditional family diamond business. They are selling diamonds through the normal retail points, but this model is now totally collapsing.

We are seeing bigger online players and online tender organisers coming into the market and taking over diamond sales. This is really happening at the moment.

Part of this voluntary liquidation is trying to these diamonds into the market via an online platform. We have had 65 people interested in stepping into the online platform and buying the diamonds.

I tried the same exercise in a bankruptcy several years ago and it was clearly unthinkable at that time. I announced I would use an online platform and everybody said that I was stupid and that I was throwing away money and throwing away assets that we could recuperate during the liquidation. Even in really traditional sectors like diamonds, we are seeing new trends and things coming in threatening traditional retail businesses.

U.S, Illinois – RF David mentioned Jamie Oliver putting GBP4 million in on a senior secured basis. That would be an extremely difficult thing to accomplish in the US. I can't even imagine a bank that would agree to allow an owner put in new money and get ahead of them on security.

Lenders would be happy to have the owner put new money in and get behind them, or put money in as equity, or on an unsecured basis. The likelihood that you would find a major bank that would agree to subordinate to new money, is next to impossible.

Another thing that we haven't mentioned is seasonality.

The timing of your problem can be everything and can affect how your creditors view you and how the marketplace views you. One of the things that was pivotal in the downfall of Toys R Us was the fact that it was forced to file Chapter 11 in September.

Toys R Us didn't want to default on certain financial covenants, and so they decided to file, but the problem was that in September you have to build up your Christmas inventory. As soon as they filed, they encountered all kinds of difficulties with suppliers that were no longer willing to deliver on open account.

The professionals working for Toys R Us did a great job of wrestling with this problem and getting it solved, but it took them six to eight weeks to get everybody in line. This meant that the product wasn't going to be fully there in time for Christmas. If Toys R Us had filed its case in April, you might have had an entirely different story, but because they filed in September the inability to have the product on the shelves for the Christmas shopping season turned out to be a major factor in a poor Christmas season.

Some commentators said they should have run through the Christmas season, sold their inventory and then filed, except that would have been a really good time for lenders to favour liquidation, because the firm had already turned so much of its inventory into cash.

It's a bit of a two-edged sword, but for a lot of traditional retailers, seasonality is a really significant issue.

Canada – FS That’s exactly what happened with Bombay and Bowring. They didn't have enough liquidity in their credit line to stock up for their Christmas and Black Friday sales.

Those are two huge seasons for anybody in giftware, and they just did not have enough credit facility to buy enough goods to stock their stores. They were very low on inventory, which really affected their ability to restructure and if you don't have the inventory in the stores, you're going to fail.

Our firm acted for a few suppliers to Toys R Us. As soon as Toys R Us filed, we renegotiated our supply contracts and the terms under which we would deliver goods.

France – YMR Beyond looking for traditional solutions such as private equity and/or business transfers, negotiation with the main creditors is very important. Solutions will emerge from these negotiations, that will reduce the liabilities owed by a retailer in difficulty.

Two opportunities present themselves when negotiations are successful. Firstly, there is the implementation of a progressive clearance of liabilities with, for example, the implementation of a trust to secure the transaction. Secondly, when the company is no longer viable because of its excessive technological backwardness, successful negotiation allows the sale of the company in order to preserve jobs and pay off creditors.

It should be noted that in France there is a special negotiation procedure with tax and social security creditors governed by the French Commercial Code. All negotiations are done with a unique institution called the Interministerial Comity of Industrial Restructuration (Comité Interminitériel de Restructuration Industrielle, or CIRI). This body’s efficiency has already proved its worth and makes it possible to obtain very interesting results. These creditors benefit from important privileges that confer on them a very advantageous place in the ranking of creditors by order. Retail was particularly affected in 2018, a year in which CIRI handled 11 retail cases, eight of which were new referrals.

The Gilets Jaunes (yellow vest) protests have worsened the situation of many companies in the sector, forcing the State to proposed accompanying measures.

The CIRI negotiations are very particular and require strong negotiations skills insofar as French tax and social institutions are rather uncompromising in their nature. As a result, solving the tax and social problems of a troubled retailer is one of the keys to successful rescue.

England – DF That example of the diamond business in Antwerp is quite chilling. Why is the market collapsing there?

Belgium – PT The main reason is transparency, driven by a lot of new terrorism-related and human rights legislation.

There is now more transparency required from people in a market that was traditionally a non-transparent sector. Diamonds are only found at certain places in the world with most in areas ruled by some of the most notorious regimes in the world.

From a lending point of view, new stricter EU regulations create more requirements around transparency and identification of those who are behind companies. That started shifting some of the market points, with diamonds now going to more structured and transparent companies who are playing on these strengths and are willing to give some transparency.

We have seen a shift to tender companies, who are working to ship and transfer these diamonds and show they have a certificate from the Antwerp Diamond Office. We call this the Kimberley Certificate.

Australia – JC The story for Australia is much the same, although collapses here often occur through a mechanism under our Corporations Act 2001 known as Voluntary Administration. It is a process where the directors (and in some instances secured creditors) may appoint an independent person (an insolvency accountant) where the company is insolvent or likely to become insolvent. This is done with a view to exploring:

  • if the company can continue in some form of reorganised structure (called a Deed of Company Arrangement);
  • a sale of the business; or
  • liquidation of the company, which all parties usually try to avoid.

The process often involves a reorganisation or sale of the business to avoid liquidation.

This process has happened to many well-known companies including Maggie T, Diana Ferrari, Gap Australia, Esprit Australia, Toys R Us etc.

Restructure and reorganisation are the name of the game in this space because collapse has often been brought about by online retail and global raiders, with many brands still having real value while unable to keep pace with the online space.

An arrangement through Voluntary Administration by Deed of Company Arrangement will require approval of creditors, with most creditors’ conscious of the difficulties in the retail space, and most hoping to avoid the consequences of liquidation.

The lesson learned in Australia is that retailers have been forced to develop niche product lines as well as competing in the online space. A successful example is Mecca, which has over 80 outlets in Australia and New Zealand with significant revenue. It is successfully competing with global brand Sephora, and growing quickly.


Philippe Termote (PT) LIGE ADVOCATEN – Belgium

Yves-Marie Ravet (YMR) Ravet & Associés – France

Robert M. Fishman (RF) Fox Rothschild LLP –U.S, Illinois

S. Fay Sulley (FS) Torkin Manes LLP – Canada East

James Conomos (JC) James Conomos Lawyers – Australia

David Foster (DF) Barlow Robbins – England