functions became problematic as they
were being handled by the distribution
company, and getting information to
the syndicate of lenders under those
circumstances was challenging. Delays
in routing shipments to the converted
stores, variances in inventory levels,
accusations of misleading advertising,
and pricing and system issues further
contributed to the challenges.
Further, the regional chain did
not make its last payment to the
combined company on the final
group of purchased stores, withheld
capital expenditure payments owed to
contractors for store conversions, and
experienced negative public reaction
to the converted stores. Added to that,
lawsuits were filed by both sides.
It all added up to quite a mess, and
the regional grocery chain eventually
needed to file for bankruptcy
protection. The question for an
asset-based lender that finds itself
in such a scenario is, can it get out?
Would the liquidation of collateral
produce sufficient funds to cover
margined advances plus expenses?
Normally a lender hopes its liquidation
analysis shows there’s a chance to
see a positive number in the end.
In the case of the regional grocery
chain, there were unexpected expenses
and required disbursements, such as
payments to employees who were let
go for paid time off they were owed,
pension obligations, and Worker
Adjustment and Retraining Notification
Act (WARN Act) payments. Additional
disbursements were required for U.S.
Bankruptcy Code Section 503(b)( 9)
claims to vendors, suppliers cutting
trade terms (some requiring c.o.d.),
and a lower-than-expected inventory.
This all translated into the lender
ending up with less collateral than
was anticipated and greater expenses
than were expected, creating the need
for it to fund into an overadvance
to get through the liquidation.
Sometimes the best option is to close
the doors and liquidate the inventory,
and as the bankruptcy unfolded, a
series of store closings began involving
locations for which it was apparent
that there was no feasible path to
resuscitating them. This first round
of store closures reduced some of
the overadvance. Some of the leases
picked up in bankruptcy as part of
the collateral package to provide the
debtor-in-possession (DIP) financing
proved to have significant value.
Lenders in retail finance have often said
that supermarkets usually don’t liquidate
but instead are sold. In considering lease
value, building new 40,000-square-
foot boxes with parking lots in dense
urban areas is nearly impossible.
Thus, the number of potential buyers
for such leases may exceed a lender’s
initial expectations. Given that other
grocers, hardware chains, or the odd
specialty retailer may be looking to
expand, there may be a robust market
for these locations in some instances.
As it turned out, there was significant
interest by other retailers in taking
over some of the grocery store chain’s
leases, which reassured the lenders that
there was ancillary value in some assets
outside of their traditional borrowing
base. However, it became apparent
that there was no buyer interest in the
chain beyond a group of 30 or so core
stores located in the regional chain’s
home territory and that the liquidation
of the remaining stores was necessary.
There are always lessons to be learned.
continued from page 19
Congratulations to the award winners:
Innovation, English, & Broadcasting
Troy Athens High School
Rochester Hills, Michigan
Linda Noble, PhD
Brooklyn College Academy
Brooklyn, New York
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