Bankrupt Retailers: Pushed to the Brink

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For some chains, times are even more desperate, and the drumbeat of retail bankruptcies grows louder by the day. So far this year, 15 retailers with assets of $100 million or more have filed for Chapter 11 bankruptcy, up from seven for all of 2007, according to Bankruptcydata.com, which tracks such filings. On Aug. 4, Boscov's, a department-store chain with 49 stores in the Northeast, filed for Chapter 11, just a week after the 177-store Mervyn's chain in California filed for protection from creditors.

Retail experts wonder what fate awaits these and other retailers such as Goody's Family Clothing and Linens 'n Things, which are already in Chapter 11. According to research tracked by LoPucki, in the 20 years prior to 2005, 41% of the 94 retailers that filed for bankruptcy went out of business. Those that emerged included such well-known outfits as Kmart (SHLD), Winn-Dixie Stores, and Macy's (M).

This time around, almost all of the retailers that filed in the first three months of 2008 dissolved quickly. The others face tough choices. Executives from Goody's and Boscov's didn't return calls to discuss their options.

Credit conditions are so tight that lenders are not willing to provide any wiggle room to distressed retailers. Talbots (TLB), for instance, isn't among the litany of bankrupt retailers. But earlier this year the upscale clothing chain had to extend its payment terms with its vendors to 45 days from 22 days, after Bank of America (BAC) and HSBC (HBC) refused to renew lines of credit worth $130 million and $135 million, respectively.

Pressure from Landlords, Vendors

File for bankruptcy, and the pressure now intensifies enormously. Prior to 2005, debtors had 60 days from filing for Chapter 11 to assume or reject a lease. Most of the time, bankruptcy courts would grant repeated extensions that lasted two years or more. Bankruptcy experts argue that gift of time was crucial: They say it takes a minimum of two Christmas cycles before a retailer is ready to put its finances in order and see if its reorganization plan is working.

But mall owners don't like to house bankrupt retailers. An extended, court-run reorganization can hurt the landlord's chance of securing positive financing terms. The real estate industry lobbied successfully for the 210-day cap on how long companies have to assume or reject leases. "Macy's got at least two Christmas seasons, but today if a company files in January, they don't even have until Christmas to decide what they will do," says lawyer Gottlieb.

Even as the lease decision looms, companies have to pay a cash deposit within 30 days to the utility companies that provide gas, electricity, and water to their stores. The purpose of that change was to provide assurance of the filer's ability to pay bills in the months going forward. Previously, just an assurance had been enough.

At the same time, vendors who ship goods to a company in the 20 days preceding a filing can get a priority claim that requires they be paid in full. The 2005 law also put an 18-month limit on how long the bankrupt company has to submit a restructuring plan; previously there was no limit. After the 18 months, creditors or other interested parties can offer their own plans.

Retailers may have stores in multiple locations and hundreds of vendors supplying a variety of items. "Stores immediately lose working capital," says Harvey Miller, a partner and bankruptcy specialist at New York law firm Weil Gotschal. He worked with Macy's in the past and has recently worked with several retailers including Goody's Family Clothing, a 355-store chain that operates in 20 states and filed for bankruptcy on June 9. Miller says Macy's reorganization, which took four years, wouldn't have been possible under the new setup. "In stress situations, you have to analyze by circumstances and not make deals under a formula," he says.