Dan O’Brien, Managing Director, Getzler Henrich & Associates, LLC, explains how a Chief Restructuring Officer (“CRO”) plays ‘quarterback’ in assuming or rejecting leases in a Chapter 11 context.
BED BATH & BEYOND might’ve stolen store closure headlines by shuttering its 800-plus stores, but the chain had plenty of company. Retailers overall closed 4,600 doors in 2023—an 80 percent increase, according to Coresight Research—as underperforming stores can be the biggest drain on distressed retailers.
All this activity kept one type of C-Suite executive very busy: the Chief Restructuring Officer, or CRO.
Unlike that other CRO, the Chief Revenue Officer, who finds ways for a retail company to grow, the Chief Restructuring Officer finds ways for it to reorganize as it faces financial and/or operational distress. In retail’s lease-heavy industry, that means assessing whether to negotiate better leases or get out of onerous ones, and how to use bankruptcy law to an advantage.
“His/Her focus will be on doing the homework, appreciate statutory timing considerations and consult with leasing experts when necessary in order to maximize value,” said Dan O’Brien, managing director, Getzler Henrich & Associates.
DO YOUR HOMEWORK
“The CRO’s initial assessment of a retailer’s operations will include a review of real property holdings to determine if leases should be assumed, assigned or rejected to maximize value and support an optimal strategy to exit Chapter 11,” said O’Brien.
Situational dynamics often change from the time when the lease was signed to today. Maybe a major mall anchor closed, thus depleting a significant portion of foot traffic. Maybe that store is in an above-market lease and the rent is just too high. Maybe the region’s demographics have shifted.
The CRO’s assessment on the operations will include 4-Wall profit/loss analysis to the EBITDA level for every brick-and-mortar store in the retailer’s portfolio. “Such 4-Wall analyses—doing the homework—empowers the CRO to pinpoint those stores that are losing money,” said O’Brien.
TIMING CONSIDERATIONS
By filing a Chapter 11 petition, a retailer can file a motion to reject any burdensome leases early in a case. A rejection motion filed close to the petition date (or with affect from the petition date) saves administrative outlay. With so many administrative Chapter 11 expenses to deal with, preserving cash flow is essential. “From the CRO’s perspective to save on administrative cash outflows, the earlier you can determine the onerous leases that warrant rejection, the better,” said O’Brien.
The U.S. bankruptcy code dictates a strict time frame in which a retailer can assume or reject ongoing leases. It provides that a debtor has 120 days after the petition date to determine whether to assume or reject a lease, and the CRO will determine whether to take advantage of the provision that allows for a 90-day extension on top of that. For retail cases especially, this 210-day timeframe affects the timing of exit strategies, whether the exit route from Chapter 11 is a standalone reorganization, a sale as a going concern or a liquidation.
“The CRO will be very cognizant of this timeline,” said O’Brien. “If a going concern sale is envisaged, timing on the closing of the sale and decisions by the purchaser on what leases are to be assigned are targeted to be made within the 210 days. Alternatively, if Going Out of Business (“GOB”) sales in leased locations are envisaged, the CRO needs to ensure the GOBs are concluded within the timeframe.”
THE IMPORTANCE OF CONSULTATION
As a quarterback for the restructuring effort, a CRO will utilize the legal expertise of Debtor’s counsel where necessary to fully understand the terms of lease documentation and all amendments to them.
“He may consult with leasing specialists such as those in Hilco Real Estate LLC who can assist in conducting negotiations,” said O’Brien.
Such negotiations may include discussions with potential buyers of under-market leases, with landlords of properties that are subject to above-market leases or with landlords of properties that are subject to leases that are likely to be rejected. “In a cost-effective manner, successful negotiations can achieve beneficial assignments, reduced rent for particular locations or reduced claims against the estate,” he added.
The U.S. bankruptcy code allows a retail debtor to conduct GOB sales to liquidate merchandise and the CRO will consult with monetization professionals such as those in Hilco Merchant Resources LLC who are expert in monetizing retail and wholesale inventory, fixtures, fittings and equipment disposition, and managing the whole GOB sale process in a distressed retail case.
“The Hilco monetization team are experts in GOB sales,” stressed O’Brien. “This way, you can maximize value to apply to the debtor’s estate, so at least you have a win from a losing event.”