Journal of Corporate Renewal

Nov/Dec 2015

continued from page 7

In 2014, for example, Coldwater Creek liquidated over 300 stores. However, a private equity firm purchased the IP and later relaunched the company as an e-tailer/cataloger. The strategy of shedding stores and selling the IP has also been relevant with recent insolvent retailers Delia’s and Frederick’s of Hollywood. Competitors may also have appetite to bid for IP as a chance to gain access to customer lists, as the information is immediately accretive to a company. For instance, Barnes & Noble purchased Borders’ trademarks and customer database when Borders filed bankruptcy in 2011. Beginning shortly after the sale and continuing to this day, all website traffic to borders.com has been redirected to Barnes & Noble’s website.

Retailers have become savvy at collecting
customer data through loyalty and opt-
in marketing communications programs
at the time of purchases. A retailer’s
customer file could contain valuable data
that includes name, address, and email,
but also purchase history with annual
spend, store preference, and product
purchases. As many consumers know
all too well from their email inboxes,
retailers use customer information to
communicate directly about the latest
sales or hot products. This information
has become a vital sales tool in this
digital age and, as such, customer
lists can have significant value.

However, lenders must be cautious. The Federal Trade Commission and state attorneys general are wary of sales involving customer information and want to ensure customer privacy rights are upheld when information is sold to a third party. This issue was publically disputed in Borders’ bankruptcy in 2011 and most recently in RadioShack’s IP sale. In IP sales within a Chapter 11, a court-appointed consumer privacy ombudsman reviews the seller’s privacy policies and provides recommendations to both seller and buyer to uphold customers’ privacy rights through a sale process. Many appraisals assume customer lists, in their entirety, will be sold with the IP; however, the valuation could be adversely impacted if the sale of customer lists is restricted or wholly prohibited due to privacy restrictions.

Structure Still Matters

No matter the industry or asset class,
lenders to the retail sector ultimately
depend on structure to minimize
losses. However, in today’s market
it is difficult to define a traditional
asset-based structure because the
variables around each retailer are as
vast as the retail landscape itself.

On the borrowing base, advancing up to 90 percent on credit card receivables and the appraised value of inventory appears to be the new normal. In preferred stable asset categories, such as department stores or sporting goods, there are cases in which senior lenders have gone farther out on the risk curve through stretches on advance rates of 5 percent or more on traditional asset classes, which inherently increases the risk of non-repayment. As mentioned, borrowers looking for additional liquidity outside of working capital assets are seeking out lenders that provide term loan B facilities or these “stretch” tranches.

A staple in asset-based documents continues to be thresholds for cash dominion and increased monitoring. For larger performing deals, cash dominion and increased monitoring triggers can be as low as 10-15 percent. Facilities continue to be governed by a single liquidity covenant—either a minimum excess availability of