Why We’re Seeing More Liquidations: One Theory


An interesting article in Business Week notes that retail liquidations are becoming a lot more common:


[In] the years prior to 2005, 41% of the 94 retailers that filed for bankruptcy went out of business ….This time around, almost all of the retailers that filed in the first three months of 2008 dissolved quickly.


Well, Fortunoff is an exception to that, but we have seen quite a few well-known names get liquidated – some of which survived the Great Depression, but can’t make it now.  And this isn’t just in jewelry – we have seen failures by well-known retailers like Sharper Image, Levitz, etc. This is a result, Business Week argues, of the 2005 “bankruptcy reform” act, which contains certain provisions sought by landlords: 


Prior to 2005, debtors had 60 days from filing for Chapter 11 to assume or reject a lease. Most of the time, bankruptcy courts would grant repeated extensions that lasted two years or more. Bankruptcy experts argue that gift of time was crucial: They say it takes a minimum of two Christmas cycles before a retailer is ready to put its finances in order and see if its reorganization plan is working.


But mall owners don’t like to house bankrupt retailers. An extended, court-run reorganization can hurt the landlord’s chance of securing positive financing terms. The real estate industry lobbied successfully for the 210-day cap on how long companies have to assume or reject leases. “Macy’s got at least two Christmas seasons, but today if a company files in January, they don’t even have until Christmas to decide what they will do,” says lawyer Gottlieb.


That lawyer – who worked on the Macy’s reorganization – said Macy’s wouldn’t have survived if it filed today.

Just judging from what we’ve seen this year, it’s beginning to seem like bankruptcy is almost a death sentence. (Again, Fortunoff is an exception. But it had an immediate buyer.) And this doesn’t seem to be helping anyone – particularly the landlords. More failing retailers mean more vacancies – at a time when mall vacancy rates are already high. As one person notes in the article: “The rule that was meant to protect landlords is now coming back to bite them, because they will be left with neither stores nor payments.” Which is why we may see reforms of the reform.


Another issue is whether the compressed timeframe is leading to more aggressive behavior by certain creditors, as the failing retailer becomes a sinking ship, and everyone just grabs what they can. There is a lot of anger at the Whitehall attorneys in their case; they managed to tick off quite a few people, including the company’s consignment vendors and the liquidator that won its auction. As the head of Gordon Brothers said in court, “I’ve seen a lot of things in this case that I’ve never seen before.” And hopefully we won’t see again. But I don’t know …

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