formula acts as a mitigating factor,
as in most circumstances it would be
unrealistic to value a landlord’s claim
based on the remaining term of the
lease at the underlying lease rates.
The value of a lease is typically based
on the term, lease rate, and location. In
Canada, there are relatively few landlords
in the shopping center arena. This
could prove beneficial in a proceeding
that involves multiple locations, in
that a debtor may have to negotiate
with only a few parties. However, it
may also create complexities because
these landlords are sophisticated and
sensitive to legal precedence, especially
if the turnaround requires that less
favorable leases be disclaimed while
more favorable leases are preserved.
In the Blockbuster proceedings, the
receiver disclaimed approximately
150 of 400 leases at the outset of the
proceedings to reduce overhead and
operating costs during the wind down.
Margins in the retail industry tend
to be higher than in other industries
to cover high overhead costs. As a
result, inventory is usually a primary
asset in retail turnaround proceedings
because it can be sold at a discount
while maintaining a gross profit. The
restructuring may permit the retailer to
reduce its inventory levels by liquidating
excess inventory from stores being
closed, thereby creating cash flow
during the restructuring proceedings.
With respect to claims from inventory
suppliers, the BIA permits unpaid
suppliers that have delivered goods
within the 30-day period prior to a
bankruptcy or receivership filing to make
claims for the return of those goods.
When inventory is the primary asset
and a debtor faces significant 30-day
goods claims but has insufficient capital
to pay for those goods, the CCAA and
the proposal provisions in the BIA can
be used to stay the unpaid suppliers
and allow the debtor to continue to
use of those goods in its operations.
In the Blockbuster proceedings,
the receiver chose to purchase the
inventory from the 30-day goods
claimants, as the profit margin would
positively contribute to the cash flow
during the wind down operations.
A retailer’s ability to operate during a
restructuring or wind down depends
largely on its receiving cooperation
from management and employees.
Incentives or key employee retention
programs (KERPs) may be considered
to maintain critical mass for ongoing
operations during a turnaround. A
retailer that has an oversupply of labor
may need to downsize its headcount.
The BIA and CCAA can be used
to reduce the labor force without
incurring substantial termination
and severance pay obligations.
If formal bankruptcy (liquidation)
or receivership proceedings are
commenced, Canada’s Wage Earner
Protection Program Act (WEPPA)
covers eligible employee wages up to
a maximum of approximately $3,600
per employee in instances in which an
employee’s employment has ended and
the amounts claimed as unpaid wages
were earned during the eligibility period. 3
A portion of this payment, up to $2,000
per employee, becomes a secured claim
that may rank ahead of all other creditors.
In the Blockbuster Canada Co.
proceedings, WEPPA provided for the
payment of the employees’ termination
The most important part of what we do is listen.
Shoe Sensation had a plan for expansion.
We just needed to ask the right questions,
listen, and learn. Once we understood their
plan, and how their business works, putting
together a smart plan for financing their
growth was a cinch. By really digging into
the details of their business, we were able
to be more flexible around reporting, control
reviews, and process improvement. In the end,
it was a win-win-win. It was a win for us, a
win for Shoe Sensation, and a win for the
communities in which they operate.
MANAGING DIRECTOR, HEAD OF PORTFOLIO MGMT