JCPenney was one of the lucky ones, if you can call any company in bankruptcy lucky.
The retailer filed for Chapter 11 in May without a definitive plan for what would come next. Penney had a reorganization agreement with lenders, but it came with contingencies and milestones that could potentially have allowed for liquidation. It was also quietly for sale. In other words, all options were open — reorganization, sale, liquidation. Amid grueling and protracted sale negotiations, David Jones, the federal judge overseeing Penney’s case, allowed Penney to extend its deadlines to let talks to continue. Jones justified doing so by saying that “the alternative is the death of an entity.”
Penney’s got its deal, with two major landlords agreeing to acquire it. But many other retailers this year, amid unprecedented disruption created by the COVID-19 pandemic, have liquidated entirely after failing to find a buyer or some other form of salvation.
In broad strokes, one of three things typically happen when retailers file for bankruptcy: lender-led reorganization, a sale of the company, or a wind down of the business and liquidation of its assets. The calculus that typically takes place is which is the best way for secured lenders and other creditors to be repaid. If they think the company is valuable and viable but just needs some trimming in the balance sheet and footprint, they could opt to convert their debt investment into equity and reorganize the company.
But that’s a longer, more complicated path to repayment. A sale provides immediate cash for creditors, and they don’t have to wait for returns on their ownership equity in a reorganized company. Liquidation provides a similarly faster path to repayment. You sell the inventory and other assets, including often a retailer’s intellectual property, and then close shop and spread around the proceeds of the going-out-of-business sales among creditors.
For everyone else, the difference between a sale and a liquidation is thousands of jobs, an outlet for suppliers and manufacturers, a store brand that thousands or millions of customers still use, and so on.
Those decisions get incredibly complicated depending on a company’s capital structure, who is holding what forms of debt and how much, and what their interests and risk appetites are. The pandemic has complicated things further.
Liquidating in a pandemic is no simple matter. Pier 1 and Modell’s, for example, had to freeze their going-out-of-business sales during the nationwide store closures this spring. As retail’s reopening approached, it wasn’t clear if customers would come to store closing sales. That affected proceeds from liquidations and forecasts of proceeds, all of which inform the decision of whether or not to liquidate a chain. Here’s a look at the major retailers… Retail Dive