National Post (National Edition)
Pandemic complicates bankruptcies
Liquidation not an option
Bankruptcies will be an inevitable part of the economic crisis brought on by the coronavirus pandemic, but that same upheaval is complicating the process of unwinding and restructuring businesses that are no longer viable.
Lawyers and bankers tasked with restructuring firms or helping companies file bankruptcy proceedings say this situation, along with government aid, might delay, but won’t stave off the eventual filings and forced sales that will shake up sectors from retail to energy.
“You can’t have a going out of business sale when you can’t get your business open. Liquidating your inventory is not going to happen when people are at home,” said Lou Brzezinski, a partner at Blaney McMurtry LLP who specializes in insolvency and bankruptcy law.
Businesses can use the bankruptcy process in times of crisis or a cash squeeze to rejig their operations, such as getting rid of debt and shedding unprofitable assets in order to perhaps emerge as a smaller, leaner, profitable company. Part of that process can involve putting up assets and inventory as collateral to entice creditors and lenders to swoop in and rescue the business.
However, with most major parts of the economy remaining shut two months into the pandemic, and consumer confidence at a record low, modelling what a business might be worth in, say, six months to two years from now is tough, given that there is very little certainty as to when consumer demand will return in full force, Brzezinski said.
A banker at a mid-sized investment firm in Toronto told the Post that he is currently dealing with a “pretty well-known” retailer that was in moderately good shape financially prior to the pandemic, but is now considering filing for bankruptcy due to two straight months of close to no revenue. He declined to be named because he wasn’t authorized to speak about the client or the transactions under consideration.
“In this situation, there’s a private-equity group interested in this retailer, coming to buy it. The banks are owed money. The landlord is owed money because rent was not paid in April and May,” he said.
Selling the struggling business to the new buyer might seem like an elegant solution, but there are competing interests and many uncertainties at play, the lawyer said.
“Now this group comes in and says, look, I want to renegotiate the lease with the landlord. I want a better deal, because there’s no way this space is going to be worth this much next year,” he said. “You’re doing this dance between the retailer, the creditors, other third-parties. And in the meantime, we are all waiting on federal funds from (Business Development Bank of Canada) to put that into our model. So it’s all a mess.”
Despite the added complications of the pandemic, some big retail names have pulled the trigger on filing bankruptcy proceedings.
On Thursday, luxury department store chain Neiman Marcus Group Inc. filed Chapter 11 bankruptcy proceedings in the United States while it tries to restructure, citing “unprecedented disruption caused by the COVID-19 pandemic.”
Montreal-based shoe retailer Aldo Group Inc. also filed on Thursday for bankruptcy proceedings in Canada and the U.S. in a move that would help restructure its debt.
Earlier this week, J.Crew Group Inc. became the first major retailer to file for bankruptcy since the pandemic began, while apparel company Reitmans (Canada) Ltd. warned it was looking for financing to meet its existing bank facilities in addition to “exploring various alternatives” for the business.
Brzezinski believes the real spike in bankruptcies will take place around September and October, because that’s when banks might start calling in loans.
“Right now, they are handling many of the defaults at the branch level and not sending it to special loans or enforcement,” he said. “And one of the reasons the banks are deferring on calling the loans is that they know there is no market for inventory and equipment.’
Bankruptcy consultant Doug Hoyes of Hoyes, Michalos & Associates Inc. said he expects insolvency filings to decline by 20 to 25 per cent in March and as much as 60 per cent in April and possibly May, because courts are closed and creditors are limited in terms of legal collection options.
“But this decline will be short lived,” he said. “We may have a delayed start, but we will see recession level growth rates for consumer insolvencies as we head into late summer and early fall.”
Lee Buckler, chief executive of Vancouver-based financial advisory firm Restructur Advisors, said he believes the slew of bankruptcies has not arrived yet due to the market being “buoyed” by government intervention.
“If they can delay dealing with it for another 30 to 60 to 90 days, they will,” he said.
An insolvency lawyer at a major Bay Street firm said his practice had picked up “six to eight new cases” across the country in the last month.
“That would not be typical even in a six-week period,” he said. “I think the tidal wave that is about to come is unprecedented.”
Retailers and energy companies, which were already financially vulnerable due to changing economic structures prior to the crisis, are the most common types of companies seeking restructuring or insolvency help, according to half-a-dozen lawyers and bankers the Post spoke to during the past week.
“I can tell you that almost all retailers and energy companies that Canadians have heard of are going through some kind of restructuring,” said an investment banker in Calgary.
“Maybe not bankruptcy yet, but they’ve definitely picked up the phone and called us,” he said, adding that his firm is “in the middle of a major restructuring with a global tourism company.”
As for whether there will be sufficient capital to swoop in and clean up bleeding companies, Buckler believes distressed debt investors have been waiting “a long time” for a recession of this magnitude.
“We have observed a great deal of capital very keen to identify and deploy into distressed situations,” he said.
A March 2020 report released by Ernst & Young LLP estimated that private-equity firms have accumulated approximately US$2.6 trillion in capital that is immediately available to deploy.
Private-equity firms and hedge funds were major players during and after the 2008 crisis, taking controlling investments in more than 80 major retail companies over the past 10 to 12 years, according to a report from the Center for Popular Democracy, a Washington, D.C.-based progressive think-tank.
One Bay Street insolvency lawyer told the Post that while there is certainly capital waiting on the sidelines, many still feel that companies are overvalued right now.
Over time, however, he believes many companies emerging from this pandemic will have some sort of private-equity ownership.