R&E Bankruptcy Update: Retail Challenges of 2020
Retail Continues to Struggle
Restaurants Face Challenges
While retail in general faced challenges in 2019, food services faced an extremely difficult period. We expect these challenges to continue into 2020. With a tight labor market, increased competition, rising minimum wages and a strong economy, restaurants continue to be squeezed. For this reason, we expect that landlords will be receiving requests for modifications, notices of bankruptcy filings and ongoing challenges in filling vacated restaurant units.
Looking at 2019, while a number of restaurants closed units, the Papa Gino’s and Real Mex cases continued to work their way through bankruptcy courts. Meanwhile, the Houlihan’s restaurant chain along with several of its subsidiaries filed for bankruptcy with Landry’s acquiring substantially all of the assets of the debtor. In a transaction of this type, landlords need to be aware of their rights as a number of leases were assumed and assigned. In the event of assumption and assignment, a landlord has strong protections under the Bankruptcy Code, including, among other things, the right to have all defaults cured. In the event the debtor is rejecting a lease, to minimize the loss incurred, it is essential that a landlord takes steps to maximize its recovery and preserve any claim it may have. In particular, landlords must act during the bankruptcy case or risk waiving certain rights and claims.
The proliferation of Lifestyle (i.e., Health and Fitness facilities) has been quite significant over the last several years. Two well-known fitness center operators, Town Sports and 24 Hour Fitness, have been noted for a change in their financial condition as discussed below.
Recent reports indicate that Town Sports International Holdings, Inc. recently had S&P reduce the credit rating on certain debt to CCC. According to reports, Town Sports has significant debt which will become due in 2020 and has suffered a decline in revenue. According to reports, Town Sports is attempting to refinance its debt.
Market reports towards the end of 2018, indicated that the value of bonds issued by 24 Hour Fitness declined into the distressed range. Once again, those who are investors, landlords or creditors of 24 Hour Fitness should carefully evaluate their exposure.
Pressure is still being felt across the retail space. Fairway Markets is rumored to be close to filing a second bankruptcy case. Pier 1 is also facing financial challenges and is said to be closing 450 stores and nearing bankruptcy. While these two retailers are noted due to recent reports regarding their financial condition, they are not alone, and the increased minimum wage will only put further pressure on traditional brick and mortar retailers. Landlords should carefully monitor their retail tenants to avoid allowing them to accrue large arrearages. It is also likely that tenants will request modifications or an opportunity to meet to discuss their lease.
Party City also continues to face financial challenges and may be slipping towards bankruptcy. The company sharply underperformed its third quarter guidance. If a party has leases or interests in Party City, they would be well advised to evaluate their current position and to consider what actions could be taken to minimize the impact of a possible restructuring or bankruptcy.
Major Changes to Bankruptcy Laws in 2020
There are major changes coming to the Bankruptcy Code in 2020. Key among these are changes to the laws affecting Small Business restructuring. Small Businesses are defined as those with less than $2,725,625 in debt. For those companies that qualify, they will be able to obtain relief without being required to abide by the Absolute Priority Rule (i.e., all senior creditors must be paid in full before a junior creditor can be paid or an equity holder can retain its holdings). Moreover, there are rumors that the debt limit could be raised to $10,000,000. If this were to occur, the vast majority of bankruptcy filings could qualify as small business filings. It is unclear if (and when) an increase in this limit might occur.
With changes and new challenges approaching, it is critical to seek counsel with significant experience in bankruptcy, restructuring and out of court workouts to advise you through the process and participate in ongoing negotiations. Rosenberg & Estis, P.C. has represented creditors and debtors in many of the largest and most complex bankruptcy cases, making us the ideal partner for any client facing these challenges. Please don’t hesitate to call us today.