Sears facing a tough enemy: a ruthless bankruptcy code

(Reuters) – When Sears Holdings Corp (SHLD.O) filed for bankruptcy under Chapter 11 on Monday, announced the closure of 142 other unprofitable Sears and Kmart sites and the reorganization of its stores in better financial condition. It also triggered a "time bomb," which retailers struggled to survive.

In the last 12 years or so, bankrupt retailers have had less time to make important strategic decisions for their survival, and homeowners and lenders have gained more weight in the process.

The change stems from a legislative overhaul in 2005 of the bankruptcy code, which forced companies to come to an agreement on their property rental contracts within seven months, or to allow homeowners to withdraw from the property. ;agreement. In the past, companies spent a year or two developing a viable survival plan.

Restructuring experts attribute the short lead times to the rapid liquidation of channels such as Circuit City, Linens 'n', Borders and Toys 'R' Us.

The law is stepping up pressure on Sears and its president, Eddie Lampert, to restructure the company and turn it into a viable and viable business.

"They have less money and a shorter period of time to make decisions," said Ted Gavin of restructuring consulting firm Gavin / Solmonese. "There is more risk of transaction."

Sears did not respond to requests for comments. A spokesman for Lampert declined to comment.

True, True Religion Apparel, Perfumania Holdings Inc., Payless ShoeSource, Gymboree Corp and Harry & David have all successfully navigated to Chapter 11. They have done so in the timeframe Sears is facing.

Many chains that have managed to reorganize in recent years have been able to negotiate lower rents from homeowners, who were willing to work with a troubled business rather than risk finding another tenant in the process. a context of strong wave of store closures.

Reuters said Monday that many major US shopping centers and malls controlled by REITs have been waiting years for Sears to disappear. They will now be able to increase contract rents, some of which were signed more than 20 years ago.

Earlier in the day, a bankruptcy judge approved $ 300 million in funding to keep Sears open during the holiday season. Sears is also considering the sale of "a large portion" of its stores and said they could be purchased by Lampert's hedge fund at an auction.

Prior to 2005, retailers had a different approach to bankruptcy. Channels, such as RH Macy & Co, typically accumulate cash at the end of the year, seek to protect themselves from creditors in January, and then spend at least a year or two developing a business plan. viable.

After homeowners complained to Congress about bankrupt "ghost tenants" blocking key locations in a mall or mall, lawmakers reacted by adding the time limit for tenancy in the 2005 Act. the prevention of abuse and the consumption of bankruptcies.

This seemingly simple change was blamed on many retail failures and had an immediate impact on the duration of cases.

Half of the bankrupt retailers reorganized successfully before the 2005 law, but only 12% subsequently did so, according to a 2014 study by Lawrence Gottlieb, a bankruptcy lawyer at Cooley.

Gottlieb also found that the average case size increased from 12 months before the 2005 law to three months. More and more retailers have begun to quickly close or close troubled stores and find a buyer for the much smaller chain that has emerged from bankruptcy, which Sears is currently considering.

Lenders who provide money to lead a retailer as part of its restructuring have been the drivers of the compressed calendar of bankruptcies. Generally, lenders use a company's inventory as collateral, so they require small crates to ensure that inventory can be sold before the retailer is kicked out of its stores.

For example, Sears lenders provided $ 300 million for its restructuring and asked the company for a reorganization plan approved by the bankruptcy court in less than seven months.

One question is how far Sears and Kmart can manage in the next holiday season.

When Toys R Us ceased operations earlier this year, its liquidation left a major gap in the toy retail market, as competitors like Walmart, Target Corp.TGT.N) and others rushed to fill.

Sears' share of the overall retail sector declined to about 0.4% from 5.4% a generation ago, said Craig Johnson, president of the consulting firm Customer Growth Partners.

Home appliances, electronics and home improvement products account for the majority of Sears revenue and generated annual sales of approximately $ 7.2 billion last year.

According to a study conducted by Michael Lasser, an analyst at UBS, in February, some device sales may yield to Amazon.com Inc (AMZN.O) because he now wears the Sears Kenmore appliance range, he said.

Eighty percent of Sears stores are a 15-minute drive from Home Depot (HD.N), Lowe's (LOW.N) and Best Buy (BBY.N), and 71% of Kmart stores are located within 15 minutes of a Walmart Inc store (WMT.N) supercenter, he believes. The retailer has since closed several stores.

Todd Zywicki, a law professor at Antonin Scalia Law School at George Mason University, said that removing distressed stores from anchor sites and replacing them with a new exciting concept is taking advantage at a whole shopping center.

"There was an integrated time bomb," he said about the 2005 law. He said that a chain does not need years to decide to keep a store. "Often you delay the inevitable."