Strategic Disposition of Assets Sometimes the Best Deal Isnt on the Courthouse Steps
Historically, distressed retailers have raced to the bankruptcy court, and the safe haven afforded by chapter 11, without giving enough thought to the non-bankruptcy alternatives available to them to dispose of excess and/or underperforming assets, and to resolve the competing claims of creditors in a time- and cost-effective manner. Experience suggests that it is possible to formulate and implement a well-thought-out strategic asset disposition and claims reconciliation program outside of bankruptcy with comparable—if not superior—results than can be achieved in a formal bankruptcy proceeding.
Traditionally, a distressed retailer files for chapter 11 protection under the mistaken belief that it can only realize the maximum return on distressed assets, and deal with the claims and interests of secured lenders, landlords and other creditors in a formal setting. Typically, in chapter 11, the asset disposition process entails the preparation of a baseline contract (leaving as few open terms as possible), selection of a "stalking horse" bid, and thereafter subjecting that bid to a higher and/or better offer process that is overseen by the bankruptcy court.1 Subsequently, the retailer is encumbered with the chapter 11 process and the delays and related costs to resolve the resulting disputes over the distribution of the asset liquidation proceeds among its various competing creditor constituencies.
The Non-bankruptcy Alternative
While the bankruptcy forum has historically provided a structured arena for a troubled enterprise to dispose of all or a portion of its excess or underperforming assets, many such enterprises have begun looking at extra-judicial avenues as viable, less cumbersome and more cost-effective means to effectuate the same end. Experience has shown that effective asset disposition strategies and claims resolutions can be formulated and implemented in the non-judicial environment with results that mirror, or exceed, those that can be achieved in chapter 11, thus making the out-of-court vehicle all the more attractive to the distressed retailer and its creditors.
In order to work properly, extra-judicial asset disposition and claims reconciliation strategies require the support of many different constituencies, including secured lenders, landlords and vendors.2 When implemented correctly, particularly with the assistance of people who understand the process, an out-of-court restructuring and/or extra-judicial asset disposition plan can be concluded in far less time and with far less expense than a chapter 11 proceeding.
Often, as is true in a bankruptcy proceeding, the key to the success of any non-bankruptcy asset disposition strategy is competition. Competition among going concern buyers and/or liquidators typically maximizes value in a bankruptcy setting, and it has obvious parallels in the non-bankruptcy context. With the assistance of an outside professional, it is possible for a distressed enterprise to design an asset disposition strategy similar to the strategies used in chapter 11 proceedings. The initial steps to be taken include: (i) identifying the assets that can best be sold on a strategic basis; (ii) formulating and implementing a bid solicitation and marketing process designed to create a competitive atmosphere among potential strategic (i.e., going concern) buyers and the leading asset disposition specialists (this process may include an auction—on terms to be set by the enterprise—following the receipt of qualified initial bids, and may also be "dual tracked," depending on the circumstances); (iii) with regard to real estate, formulating and implementing an orderly solicitation, auction and settlement process, including negotiations with landlords concerning their relative interests;3 (iv) preparing a baseline contract and related agreements to implement the desired asset disposition transaction; (v) determining the highest and best offer received; and (vi) negotiating and finalizing the definitive documentation memorializing the asset disposition transaction.
At the same time that the assets are being disposed of, a claims reconciliation process can be formulated and implemented, such that at the end of the process, distributions to affected creditors can be achieved in months as opposed to years in the case of more formal bankruptcy proceedings. As a result of the speed and cost savings that can be achieved in the out-of-court context, all interested constituencies benefit significantly.
Some Selected Cases on Point
Unsecured creditors and retailers have engaged professionals in numerous out-of-court cases to shepherd them through the non-bankruptcy asset disposition process. These engagements were highly successful in that significantly enhanced asset and creditor recoveries were generated with substantially less cost and time than could have been achieved in a formal bankruptcy setting. Some selected examples follow:
Showroom Catalog Retailer: This was a case of a failing catalogue showroom retailer with approximately 25 retail, warehouse and distribution, and central office and administrative facilities. As a result of a cooperative venture between the company's secured lender and its key vendors, it was determined that the company's assets needed to and could be liquidated, and the proceeds distributed to interested constituencies without resorting to a formal bankruptcy proceeding. With regard to the company's physical assets (e.g., merchandise inventories, furniture, fixtures and equipment (FF&E)), a baseline contract was prepared, and a "stalking horse" bid was selected. Promptly thereafter, the remaining asset disposition specialists participated in an auction, with the highest and best bid being accepted at the conclusion of the auction. Separately, real estate marketing and disposition specialists were engaged to dispose of the company's owned and leased real estate.4 As a result of these strategies, the universe of the company's assets was disposed of and the proceeds made available to the creditors in less than 120 days, and at a fraction of the cost than that which would have been incurred in a chapter 11 liquidation case.
Sporting Goods Retailer: In another case involving a nationally known sporting goods apparel and equipment retailer, the company needed to eliminate a substantial number of underperforming locations and its assets without resorting to a formal bankruptcy proceeding to dispose of these locations and limit landlord claims. Professionals formulated a strategic asset disposition program premised on creating a competitive atmosphere between the leading national asset disposition firms. After preparation of a baseline contract and a selection of a stalking horse bid, the company solicited additional bids and conducted an auction. The results of the auction yielded a significantly higher return for the company than was presented in the initial stalking horse bid. At the same time, the company was successful in negotiating highly favorable settlements with its landlords, which resulted in lease termination claims significantly lower than provided for under applicable state law.
Lumber and Home Improvements Retailer: In another case involving a well-known Canadian retailer of lumber and home improvement products facing the need to eliminate a significant number of underperforming locations and related assets, professionals formulated a baseline contract and thereafter subjected the offer of its "stalking horse" liquidator to a competitive environment. As a result of the company's solicitation of competing offers from other liquidators, the company received bids that were approximately 10 percent higher than the initial stalking horse offer.
As the preceding experiences demonstrate, distressed enterprises no longer have to resort to chapter 11 in order to dispose of non-productive assets out of fear of lower returns or higher claims. Instead, an experienced asset disposition consultant can successfully shepherd an enterprise through the asset disposition process outside of bankruptcy with comparable results.
1 Section 363(b) of the Bankruptcy Code authorizes a debtor to sell its assets outside the ordinary course of business, after notice to parties in interest and approval by the bankruptcy court. It is important to note that, although subjecting a proposed asset sale to higher and/or better offers has become a standard component in asset sale transactions in a bankruptcy setting, it is not expressly required under the Bankruptcy Code. Rather, over time it has become an accepted method of establishing the soundness of management's exercise of its business judgment in determining to sell a business or its assets under stated terms. Return to article
2 Many industries have established trade groups, recognized and respected professionals, or other outlets that are effective in organizing unsecured creditors in an out-of-court context. Return to article
3 Negotiations with the landlords can be of vital importance to the success of an out-of-court asset disposition, since, unlike in a bankruptcy proceeding where a landlord's lease termination damage claim is capped under §502(b)(6) of the Bankruptcy Code, state law typically provides no comparable damage limitation. Additionally, the typical retail real estate lease contains restrictive clauses limiting the ability of a retailer to conduct a "going-out-of-business" sale from the demised location. Relief from these clauses facilitates the realization of maximum value from an asset disposition specialist. Return to article
4 One of the key aspects to a non-bankruptcy leased real estate disposition program is the negotiation with landlords, in which here the company was largely successful in limiting landlords to unsecured lease termination claims that were consistent with that which could be asserted in a bankruptcy proceeding. In this process, the threat of a bankruptcy filing was effectively used as both a shield and a sword to dissuade landlords from asserting exorbitant claims that would serve to significantly dilute creditor recoveries. Return to article