In the event of liquidation, what are some of the challenges specific to retail in terms of asset di

The following article discusses session three in the IR Global Virtual Series on ‘The Retail Apocalypse’

Australia – JC Upon liquidation, there is very little
for creditors, because most stock is secured by general securities, helped by
suppliers or financiers. There is little, if any, value in taking over
premises. Even then, landlords will need to provide consent and that will not
be forthcoming.

There are also many other complex issues including gift
cards and security disputes. These problems, encountered with little or no
return in the liquidation space, drive sale or reorganisation, provided those
options are available.

U.S, Illinois – RF When large retailers go out of
business and hundreds of lease locations become available simultaneously, it
creates a glut of real estate that exceeds the market’s ability to absorb it.

With Toys R US, there were owned stores that were subject to
mortgages and were being sold to end users or financial buyers. The banks that
held the mortgages on everything had to make a decision on a store-by-store
basis about whether they should hold the store for a while, hoping the market
price rebounds, or sell, take the cash and run.

In the specific part of the Toys R US case that I was
involved with, there were at least a hundred and twenty-five stores in the
sale. Only about 15-20 of the locations were sold to third parties and ended up
taking the rest of the properties themselves to manage and sell over time at
the lender's leisure.

That was going on simultaneously with about 600 leased
stores being given back to the landlords. This created an unbelievable amount
of available real estate in US malls around the country, with not enough users
who wanted to pay that kind of retail lease price for property.

Many of these spaces are now being used in completely
different ways than they were ever used before, at rents that are much lower
than what those landlords were able to extract in a traditional retail market.
The leases present a particularly complex problem for the parties that are
trying to realise value from them.

Canada – FS I'm working on a matter right now, which
is typical from a landlord’s perspective.

We're acting for a law firm here in Canada that is going
into disillusion. The offices look just like any typical law firm offices look
like here in Canada, where the lawyers all have typical offices with windows
and the staff work on the interior of the office.

It’s a big space, but the landlord cannot re-lease it to
another law firm because nobody wants space that looks like an old law firm
anymore. It is proving very hard to get value out of leased premises without
taking it back to base building and recreating new premises that look totally
different.

England – DF A lot of the companies in the UK have
got space that first came onto the market in the 1960s and 1970s.
Fundamentally, they are fairly ugly functional buildings that it is hard to do
too much with.

Auctions have a role sometimes, but you've got to be careful
about knowing you’re getting the true value from a sale.

Managing the portfolio is obviously key. We have many large
retail firms that are looking very hard at what leases are coming to an end and
how they can divest themselves as quickly as possible of that part of their
portfolio.

Larger landlords such as Intu have certainly pushed back
against a lot of reductions coming from company voluntary arrangements,
regarding them as unfair and possibly damaging in the future.

Belgium – PT The problem with retail bankruptcies is
that, as a receiver, it’s very difficult to get value out of it these days.

Seven or eight years ago, when retail companies went
bankrupt, other competitors on the market were seeking to take over the lease,
because of the good location. They were willing to pay significant amount for
the possibility of taking over the lease.

Today, we get zero euros for taking over leases and we get
really poor results on the sale of the assets of retail companies. This is a
trend that we are seeing across Belgium.

France – YMR Judicial liquidation in France is the
final step when recovery is clearly impossible. Asset disposal is a very
important issue as retailers usually hold a large amount of stock.

Either the sale of the company is possible and the buyer
must take over a substantial part of the stock, or a sale of individual assets
is set up by mutual agreement or by auction.

The main aim is to sell stock for a fair price, often lower
that outlets prices, in order to compensate for the damage suffered by
employees. That is the case with the liquidation of Sonia Rykiel.

CONTRIBUTORS

Philippe Termote (PT) LIGE ADVOCATEN – Belgium www.irglobal.com/advisor/philippe-termote

Yves-Marie Ravet (YMR) Ravet & Associés – France www.irglobal.com/advisor/yves-marie-ravet

Robert M. Fishman (RF) Fox Rothschild LLP –U.S, Illinois www.irglobal.com/advisor/robert-m-fishman

S. Fay Sulley (FS) Torkin Manes LLP – Canada East www.irglobal.com/advisor/s-fay-sulley

James Conomos (JC) James Conomos Lawyers – Australia www.irglobal.com/advisor/james-conomos

David Foster (DF) Barlow Robbins – England www.irglobal.com/advisor/david-foster

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