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
10 percent at all times or a springing
fixed charge covenant tested when
liquidity drops below the same amount.
Sachin Adhikari, CTP
Deloitte Financial Advisory Services LLP
James Calandra, CTP
CRS Capstone Partners LLC
Howard Cohen, CTP
Asterion, Inc.
Michael DuFrayne, CTP
EisnerAmper LLP
Tom Harig, CTP
The Keystone Group
Andrew Hinkelman, CTP
FTI Consulting, Inc.
TMA congratulates the following individuals for
achieving the Certified Turnaround Professional
or Certified Turnaround Analyst credential: