The Apocalypse

Virtual Round Table Series Insolvency Working Group 2019 Virtual Series | The Retail Apocalypse

The Retail Apocalypse

The retail apocalypse is real and is coming to a high street near you, although In the following report we hear about the global collapse of Toys R US and the the chances are it has already shown its face. distress caused to landlords, when hundreds of outlets ceased trading at the same time. We also hear about the Arcadia group in the UK and the Company The days of bricks and mortar retailing are rapidly coming to a close, accord- Voluntary Arrangement (CVA) schemes which have resulted in steep reduc- ing to most industry analysts, as the world enters an internet age where only tions in rent for landlords. the most innovative survive. Retailers experiencing the ill-effects of the apocalypse require the help of The numbers are terrifying. A recent report into the US retail sector by invest- trusted advisors to navigate through the complexities of insolvency, if they ment firm UBS, suggests that US retailers have closed more than 15,000 are to avoid liquidation. Restructuring on many levels is crucial, from business stores since 2017, including 1,470 Radio Shack outlets, 735 Toys R Us shops models to debt repayments to save these businesses from oblivion. and 700 GNC stores. The report estimates that a further 75,000 stores selling , electronics and furniture will close by 2026. By then, it forecasts that Read on for the views of six IR Global insolvency experts from across the 25 per cent of all US retail sales will be made online. world, acting for retail businesses in their respective jurisdictions.

The plight of Holdings starkly illustrates this issue. At its peak in 2006, the firm had 3,843 and Sears stores across the and , employing 312,000 staff. Following a long, complex Chapter 11 bankruptcy process in 2018, there are now just 425 stores in the US, employ- ing approximately 45,000 staff.

The UBS report goes on to say that the average US household spent USD5,200 online in 2018, up almost 50 per cent from five years ago.

This is not just a phenomenon in the United States. In this report, we discuss the plight of the diamond industry in Belgium, the home furnishings sector in Canada and some high profile administrations in the .

The major reason for the apocalypse is the inability of the traditional retail model to cope with online retail. Online behemoths like have very quickly changed the rules around cost, inventory and delivery making it extremely difficult for incumbent businesses to compete. Those that survive, have developed their own powerful online sales platforms, embraced social media marketing and created better user experiences in physical stores.

For those that haven’t adapted, the complexities inherent in falling into finan- cial distress are significant, particularly for large multi- retailers. Debt may need to be restructured, leases renegotiated with landlords and stores consolidated. The knock-on effects for staff, pension funds, suppliers and creditors are also huge, requiring careful handling.

The View from IR

Thomas Wheeler Each discussion features just one representative Founder per jurisdiction, with the subject matter chosen Our Virtual Series publications bring together a by the steering committee of the relevant working number of the network’s members to discuss a dif- group. The goal is to provide insight into chal- ferent practice area-related topic. The participants lenges and opportunities identified by specialist share their expertise and offer a unique perspec- practitioners. tive from the jurisdiction they operate in. We firmly believe the power of a global network This initiative highlights the emphasis we place on comes from sharing ideas and expertise, enabling collaboration within the IR Global community and our members to better serve their clients’ interna- the need for effective knowledge sharing. tional needs. irglobal.com | page 3 BELGIUM FRANCE U.S – ILLINOIS Philippe Termote Yves-Marie Ravet Robert M. Fishman Partner, LIGE ADVOCATEN Founder, Ravet & Associés Member, Fox Rothschild LLP

 32 3 226 80 80  33 1 44 29 31 62  1 312 541 0151  [email protected][email protected][email protected]

Philippe started at Lige immediately after his Yves-Marie created his firm in 1991, and is a Bob resolves difficult financial issues for clients education at the University of Antwerp and the passionate entrepreneur, with a keen sense of and partners with them to find the most efficient European Law School of Maastricht. He has negotiation. and beneficial solution. since made partner at the insolvency firm, which He has been advising companies and their Chair of the firm's Financial Restructuring & specialises in all matters regarding liquidation. managers for more than 30 years. His practice Bankruptcy Department, he represents debtors Philippe is very knowledgeable on both aspects includes both counsel and litigation and is and creditors through the bankruptcy process of insolvency (continuity of enterprises act and focused on trust as well. He assists his clients and in informal, out-of-court workouts. He has receivership). with their day-to-day corporate and contractual represented clients in numerous industries legal needs, as well as with their complex exter- including health care, telecommunications, nal growth operations (mergers, joint-ventures). manufacturing, real estate, retail, transportation and financial services. Highly experienced, Bob The majority of his clients are institutional has participated in all aspects of the bankruptcy creditors, which he assists in all the aspects of process. He has represented trustees, debtors, insolvency proceedings, debt restructuring terms, creditors and equity committees, secured and drafting schemes of arrangements. His area of unsecured creditors, purchasers of assets and expertise also covers debt recovery and judicial litigants in adversary proceedings. bid offers. Bankruptcy mediation has become a signifi- He holds a Master’s in business law at Paris cant part of Bob’s practice. He was appointed X university, a post graduate diploma (DEA) in the Special Mediator in the Lauth Investment British and North American business law (under Properties, LLC (Indiana) case and successfully the supervision of Professor Blanc Jouvan) and assisted parties in reaching a global settlement acted as a visiting scholar at Columbia University. that allowed for the confirmation of a Chapter 11 plan of reorganization.

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CANADA EAST ENGLAND S. Fay Sulley James Conomos David Foster Partner, Torkin Manes LLP Member, James Conomos Partner, Barlow Robbins

 1 416 777 5419 Lawyers  44 1483 464243  [email protected][email protected]  61 7 3004 8200 Fay is a partner at Torkin Manes, and head of  [email protected] David is the Head of Dispute Resolution at Barlow the Banking, Finance and Insolvency Group. Robbins, a leading UK law firm. His areas of prac- James was admitted as a solicitor in 1987, hav- She acts extensively for institutional and private tice include insolvency, professional negligence, ing completed a year in 1986 as associate to lenders and borrowers in a wide range of financ- commercial litigation, property disputes and the then Chief Justice of the Supreme Court of ing transactions, derivative products, factoring inheritance disputes. Queensland, The Honourable DG Andrews. In arrangements, asset securitisations and securi- his early years, he gained experience in a wide David regularly handles cases in the higher tised loans. range of areas but quickly settled into litigation. courts for clients of all sizes, including banks, She advises banks with respect to regulatory By 1990, he was established as a commercial insurers and educational institutions. He has and other issues that may arise under the Bank litigation lawyer with a keen interest in insolvency handled more than 300 mediations across the Act, or other similar legislation, including a broad matters. He established James Conomos Law- UK with a success rate of over 90%. range of issues of concern, such as cost of yers on 1 July 1992 as a specialist practice in He has wide mediation experience, lecturing borrowing disclosures, privacy, identification of commercial litigation and insolvency. on mediation in Kenya and is a member of the clients, money laundering, electronic banking and Since 1990, he has practised as a solicitor pri- Commercial Litigation Association, the Profes- other day-to-day issues affecting banks and other marily in commercial litigation, dispute resolution sional Negligence Lawyers’ Association and the financial institutions. and insolvency matters. James has acted in International Bar Association. Fay is involved in corporate restructurings, insol- and advised various parties in many insolvency He is also a member of the standing conference vency and related litigation administrations, both corporate and individual. of Mediation Advocates and a mediator member He has advised a range of clients including matters of all sizes. She offers expertise under of a number of mediation groups including the financiers, insolvency practitioners, creditors and the Bankruptcy and Insolvency Act, Companies ADR Group, Expedite Resolution and Law South regulators. Creditors Arrangement Act, Personal Property Mediators. He is actively involved in a number of Securities Act, and Financial Administration Act. James has also acted in hundreds of litigious charities and organisations, including as trustee. matters, in a range of disputes from land valu- Fay works closely with other members of her A recent independent guide to the UK Legal ation, contract disputes, breaches of fiduciary firm’s Banking, Finance and Insolvency Group to Profession named him as a ‘very good lawyer’ duties, fraud claims, building disputes and debt assure clients that someone is always available to who ‘gets down to the heart of an issue’. Karen claims. He has acted in all courts throughout Aus- provide the advice they need, when they need it. Schuman, Counsel of 1 Chancery Lane said that tralia, and represented his clients in many cases, David has a ‘calm authority’ and can ‘find the some of which have changed the law. solution’ in a difficult case.

irglobal.com | page 5 SESSION ONE - TECHNOLOGY How has technology affected the retail industry in your jurisdiction. Are you seeing more insolvencies? Any examples?

U.S, Illinois - Robert Fishman (RF) There's to buy that product. They're all going to have their costs or margins set correctly, so that no doubt that developments in many indus- to continue to adapt to this environment and they're able to pay the fees that are payable tries cause change, and change generally figure out a way to be competitive in an online to Amazon. results in winners and losers. world. U.S, Illinois - RF It is a complicated process The retail industry is certainly going through Canada - S. Fay Sulley (FS) In Canada, we and it does require the devotion of a certain that kind of evolution right now. Ten years also have and other large . amount of revenue, but I think it's probably ago, when people wanted to go shopping, Those companies have all had to develop a logistics more than cost. they hopped in their car, drove to a mall, significant retail online experience for shop- Cost is a factor in anything and they have to walked around and shopped. pers. That includes companies like Home devote revenue to one thing, which means Depot, because if you're supplying anything During the last 10 years there's been an they can't devote it to another. My experience that people need for their homes you really incredible change in the shopping habits has mostly been that they don't catch on to need an online presence. For the younger of people. has become the logistical game fast enough. They don't demographics, that applies to clothing as the norm and the challenge for traditional position themselves to have the right prod- well. retailers has been how do they adapt to that ucts available at a competitive price. changing environment. Our firm has just acted for two companies England - David Foster (DF) Technology is that ended up going bankrupt last year. I've seen various companies around the certainly one great factor that's influencing One was called Bombay and the other was United States catch that wave early - Target some of the issues arising in the UK. Bowring. They had been around in Canada and Walmart being good examples. They in various iterations for over a hundred years. The Arcadia Group is an interesting example are retailers who seem to understand that of a giant retailer experiencing this problem. the traditional model alone was going to be One of them was selling furniture and one of It has 520 shops and brands including Top- problematic and so they have combined them was selling household goods such as shop, Selfridges, Wallace and Dorothy Per- the traditional retail approach with the online wine sets and glasses and dishes and any- kins, and has seen sales decline swiftly. This shopping approach that has become so thing you can imagine in an upscale home is largely because younger shoppers have popular. store. Those stores had not developed an abandoned its brands in favour of online fast online presence and they just couldn't keep Other companies have either been slow to fashion rivals such as Boohoo, where sales in up with the other competitors in the area that react, or haven't reacted at all. The company the UK are up 27 per cent. were selling online. that I have had the most experience with is Boohoo has got brands like Pretty Little Thing Toys R Us. It was very sad, because they've been in and Nasty Gal, which is cheap online fashion, Canada for so long in many secondary Toys R Us thought it was catching the wave of with intensive online marketing and celebrity locations across the country. There was over online shopping, but what it discovered was endorsement. It is fascinating to note that they a hundred stores, and it really affected the that Amazon had set the bar pretty high. You spent GBP80 million on marketing last year class B landlords. There was a real loss to the cannot succeed in the online shopping world and booked a GBP60 million profit. mid-sized towns when Bombay and Bowring unless you are competitive with Amazon. went under, and there's a trickle-down effect Costs in the UK are a problem and online This means tremendous selection of product, from that in the sense that they were a lot of does help with that. Arcadia had problems great customer service and free next day job losses in those areas. with salaries, rents and pension costs under delivery. the traditional model. They were paying The clothing sector is taking a bit of a hit here That's a challenge for a traditional retail busi- GBP50 million per year in pension contribu- in Canada as well, since we keep seeing ness because it’s not the sort of structural tions, which is quite something. clothing stores go out of business. I have model they have operated under. Toys R Us no idea why that is, but they are not getting Boots is still making a profit with a traditional wasn't sufficiently successful in doing that, the online shopping that some of the larger business model, but they're really struggling and I would say that its inability to compete stores are getting. in many ways, with profits down 18 per cent with the Amazons and Targets of the world this year. It's seen shop footfall reduce, as played a significant role in the demise of the Some of the smaller clothing chains don't younger customers go online. It is trying to Toys R Us franchise in the United States. know how to get into Amazon, while the cost reinvent its makeup counters and has signed of selling through Amazon is higher than they Technology is a serious challenge in the retail a deal with Rihanna to manage her beauty had anticipated. They haven't really gotten industry for those retailers who are not such range. a brand that people have to go to the store

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There's also a genuine worry in the UK about their products. We have a lot of mil- In this respect, it is worth recalling what around zombie businesses that don't have lennials buying those products, and if you're happened to Kodak in the early 1990s the money to invest in meeting some of not adapted to the millennial you will be out. when the transition from film to digital was these changes. not anticipated. England – DF Have you found pop-up Relative regional and geographical dispari- stores be successful in Belgium? French restructuring practitioners have ties exist in the UK in terms of areas where carefully monitored the recent bankruptcy Belgium – PT Only to support other forms retail has continued to thrive. For example, of the Sonia Rykiel group. This is another of distribution or to raise a product’s profile particularly in former industrial towns in the example of bankruptcy in the retail sector in the market. North, the rate of high street store closures resulting from the explosive mix of finance has been alarming, measured against the Canada – FS We see little independents and industry. No buyer was found, so the relative resilience of productivity in south- using pop-up stores here in Toronto, where commercial court of Paris decided to open ern commuter towns and cities such as they're just going out to get their merchan- a liquidation. Guildford. Whether this trend will continue dise known. They are usually located in It should be noted here that the profitability remains to be seen, particularly with the UK places that would otherwise be vacant in logic of financial investors does not always Government's repeated promise to inject life any event. correspond to retailer business models. The (and funds) into its “Northern Powerhouse”. Australia – James Conomos (JC) In Aus- bankruptcy of the Rallye group (Casino's On the positive front, there were 34,500 tralia, the position has been similar with supermarkets) is also an example of how independent high street shops opened in globalisation hitting the Australasia region. hyper-debt on the stock markets does work the past year in the UK, up 4.5 per cent on There have been many corporate collapses for with retail businesses. 2017 figures. It seems that owners with a including Roger David Menswear – 57 As a fellow entrepreneur, I would advise passion for what they do and their commu- stores closed in late 2018. Other compa- retailers to anticipate. Anticipation is the key nities will have a degree of success, but it's nies have used Australia’s insolvency laws word in entrepreneurship. As lawyers spe- not easy. to restructure either for ongoing trading or cialising in insolvency matters, we intervene sale. Belgium – Philippe Termote (PT) I'm based downstream to try to treat illnesses when in Antwerp and we're seeing the same kind Historically, Australia was spared from the situation is already compromised. In this of movement. Our law firm has been repre- global competition due to its remote loca- respect, anticipation is also very important senting a lot of textile producing companies, tion but that has changed with the advent of because the more solutions that can be and over the last 10 years we've seen a shift technology. Global brands such as H&M, implemented upstream, the greater the in retail. and have raided Australia pro- chances of rescue. viding stiffer competition. There used to be a lot of multi-brand stores In France, we have a powerful tool that where production was retailed, now, since Another significant issue for Australian allows the debtor to negotiate almost infor- the new technology, we've seen boutique retailers, apart from global competitors mally with his main creditors in the context or multi-brand stores gravitate to expensive entering the market, has been competition of conciliation. This conciliation will result streets. Large fashion brands used to work from online retailers. It has been suggested in either the establishment of a settlement with boutiques or multi-brand stores, but that online spending in Australia in 2018 protocol, or the opening of a safeguard to they have stopped working with them due to increased by 24 per cent, which is claimed force recalcitrant creditors to vote on a debt unpaid invoices. to comprise AUD27.5 billion in lost sales settlement plan which will make it possible from traditional retailers. to reschedule claims over time (maximum Today we see that they've done a shift to 10 years). retailing their own products. They get a big France – Yves-Marie Ravet (YMR) I think flagship store where it is possible for cus- that the retail apocalypse that my colleagues Last but not least, a sale in the particular tomers to buy and try on the clothes, but have noticed in their respective jurisdictions context of a recovery procedure (redresse- they have a much bigger revenue coming is a global movement that particularly ment judiciaire) remains the preferred from their own websites. They will also sell affects France. A number of dematerialised remedy when the retailer's business model via fashion websites with big followings, commerce and innovative applications have appears completely obsolete, but a buyer is giving the potential for significant marketing gradually affected physical commerce. still interested in the debtor's tangible and and high budgets. intangible assets. I would also mention the restructuring of This has also allowed them to deal with Toys R Us, where the French subsidiary also some logistics problems, because we've suffered from the difficulties of the American seen some smaller websites which cannot group. The opening of a safeguard proce- cope with volume. From that point of view, dure (sauvegarde judiciaire) and then a the high streets are still expensive because judicial recovery procedure (redressement the landlords are not willing to let the lease judiciaire) led to an exit from the top through prices go down. In those big streets, more the takeover of the subsidiary by PICWIC of the boutiques stores are empty at the group belonging to the powerful Mulliez moment. If demands falls further, the land- family. lords will have to do something. Beyond this particular case, retail players, We have also seen a lot of pop up stores, like in any other sectors of activity, must which will work for those who have a good tackle the challenge of technological shifts marketing concept and are passionate or risk being pushed to the margins. irglobal.com | page 7 SESSION TWO - RESTRUCTURING How can these businesses avoid falling into liquidation? Are you helping any insolvent retail operations to restructure?

U.S, Illinois – RF It's quite a challenge to My original example of Bombay and Bow- England – DF How do people view private try to revitalize a retailer that's not effectively ring is a good example of a failed restruc- equity in Canada and the US? How warm competing in the market. The reason is, you turing. We restructured those companies do you generally feel about private equity? almost always need new money, or signifi- in 2015, which isn't so long ago. They Canada – FS It depends on the industry. cant restructuring. In order to accomplish originally had about 200 stores across Our law firm has a lot of private equity that, you have to be able to show that you Canada with unsecured debt across the clients who are investing in all kinds of busi- have a business model that can be suc- world, because they had a lot of suppliers nesses, whether it be landlords, property or cessful. in China and Indonesia and Malaysia. cybersecurity. The real challenge for most of these enter- They also had a lot of lease commitments We're not seeing a lot of investment in retail prises is on the business model side, more with the 15 or 20 biggest property manage- though. We’re even finding investment for than the financing side. Insolvency profes- ment firms in Canada. They failed following manufacturers, but not so much in retail sionals can do a lot to help people with first restructuring and part of the reason for right now. structure and with converting debt to equity. that was because they hadn't changed their They can release debt through formal or business model enough. England – DF Footfall in the UK’s high informal proceedings, but you must have streets, shopping centres and retail parks In 2015, they went to their banks and a business operation that is profitable. The has seen its biggest reduction in six years. secured creditors, their investors and their circumstances that led these businesses to unsecured employees and said this busi- Some people have been quite successful difficulties in the first instance are going to ness is going to fail unless we get these in terms of raising money, a good example repeat themselves even after a restructure, concessions. We did a very good job of being retailers that do generally one thing if you haven't addressed the business defi- restructuring the debt, restructuring the well rather than trying to be all things to all ciencies. leases, restructuring all of their legal obli- people. JD Sports has just joined the FTSE Insolvency professionals can’t solve that gations, but what the client did not do was 100 Index on this model. problem. A business either has to down- restructure its business operations and turn Experience-led stores have also been size, or change its geographic mix or it into a profitable venture. successful. Primark has got a 160,000 product mix. It must also figure out how to Three years later in 2018, they had to do square foot Birmingham store, which has successfully and profitably implement the another restructuring because they were up got a beauty clinic, three dining venues and online side of its business. Those are the against their credit line and had no more mobile charging points. real challenges that are facing the retail credit available to them. They were borrow- industry, and I don't think it's driven by a Avoiding the squeezed mid-market is ing in excess of a hundred million dollars at lack of legal and financial approaches to another strategy. Debenhams is a good that time just for working capital purposes. problem-solving, rather it’s about under- example of a model where they're trying standing how to be successful in today's When they tried to restructure for a second to restructure at the moment, recognising marketplace. time, the landlords were not happy to deal that people do combine purchasing cheap with them and neither were the banks. items with expensive pieces such as shoes Landlords are pretty cognizant of the fact There was no effective restructuring the and handbags. that empty space produces no income. second time around. There's been a glut of space given back The ability to respond to trends is important to landlords, and they're trying to figure out Both companies had also looked at private and a good reason why online has been what to do with it, so restructuring leases equity ownership. In Canada, we have a lot successful. Online shopping is worth about is certainly not an unrealistic thing to talk of private equity shops from the US coming 18.7 per cent of UK retail sales. I recently about doing. The issue is showing land- into Canada and buying assets, because dealt with a teddy bear store just near us lords that the real business problems are to the US the Canadian Dollar is still a that sells as much online as they do from solved, in addition to fixing things on the bargain. their shop, although the shop is important cost and expenses side. Landlords do not because people can go and experience the Companies in Canada cannot attract US want to have to address lease restructuring teddies there. investment, unless they're showing a good a second or third time. bottom line. Canadian retailers are still Next is another very interesting example in Canada – FS Canada and the US has a lagging behind the US, and so a lot of the the UK. They've got 500 stores and about a lot of common landlords, private equity US investors aren't willing to invest in failing fifth of their staff dealing with online returns. houses and retailers. Our markets are more businesses or businesses with challenges. or less similar.

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In terms of methods of restructuring, we’re The only thing we are involved in from the US. I can't even imagine a bank that seeing six major strategies. the retail point of view are bankruptcies. would agree to allow an owner put in new We have worked with some private equity money and get ahead of them on security. 1. Stopping Production. clients looking to do some bargains, but Lenders would be happy to have the A good example in the UK is car produc- there is no interest in buying insolvent owner put new money in and get behind tion, where the number of cars currently retail businesses. them, or put money in as equity, or on an produced is 20 per cent down on last We had a shop in Antwerp that went unsecured basis. The likelihood that you year. bankrupt two months ago. It was a well- would find a major bank that would agree 2. Fresh Capital. known shop, in a nice location with all the to subordinate to new money, is next to high end shoe brands. They wanted to go impossible. Capital for restructuring into new areas big time and spent EUR3 million euros such as automation or the client experi- Another thing that we haven't mentioned on decorating some prestigious new real ence. is seasonality. estate. Two months after that, they trans- 3. Private Equity. ferred to the new shop, but were not able The timing of your problem can be to make the business profitable. everything and can affect how your cred- We had a bit of an issue here with British itors view you and how the marketplace Steel where Greybull Capital took control Just a couple of minutes after the insol- views you. One of the things that was of the company a couple of years ago for vency was announced, we asked one of pivotal in the downfall of Toys R Us was a pound and is now asking the UK govern- our other retail clients whether or not they the fact that it was forced to file Chapter ment for a GBP75 million bailout. At the were willing to buy this store from insol- 11 in September. same time, Greybull Capital is pumping vency and they said absolutely not. There GBP42 million into a French steel works. is a total disinterest from industry players Toys R Us didn't want to default on and private equity place in restructuring certain financial covenants, and so they 4. Shareholder Control. retail companies. decided to file, but the problem was that In January the shareholders of Metro Bank in September you have to build up your One point of interest here in Antwerp at found an accounting error, which left the Christmas inventory. As soon as they filed, present is the diamond apocalypse. We bank without enough capital as a buffer they encountered all kinds of difficulties are involved in the voluntary liquidation against certain loans. Legal & General has with suppliers that were no longer willing voluntary of a traditional family diamond used its power to vote against the founder to deliver on open account. business. They are selling diamonds Vernon Hill having more power, while also through the normal retail points, but this The professionals working for Toys R Us trying to ensure that the bank cuts its ties model is now totally collapsing. did a great job of wrestling with this prob- with Hill's wife, who has been paid over lem and getting it solved, but it took them GBP20 million for store fit-outs. We are seeing bigger online players and six to eight weeks to get everybody in line. online tender organisers coming into the 5. Company Voluntary Arrangements. This meant that the product wasn't going market and taking over diamond sales. to be fully there in time for Christmas. The Arcadia group closed 50 shops This is really happening at the moment. If Toys R Us had filed its case in April, closed and saw rent reductions of Part of this voluntary liquidation is trying you might have had an entirely different between 25 and 50 per cent in a whole to these diamonds into the market via an story, but because they filed in September bunch of other stores. At the same time online platform. We have had 65 people the inability to have the product on the there was the need to pump money into interested in stepping into the online plat- shelves for the Christmas shopping sea- pension deficits. form and buying the diamonds. son turned out to be a major factor in a 6. Administration. poor Christmas season. I tried the same exercise in a bank- Jamie Oliver's Italian chain is a ruptcy several years ago and it was Some commentators said they should good example of a recent administration clearly unthinkable at that time. have run through the Christmas season, in the UK. A thousand jobs were lost with I announced I would use an online plat- sold their inventory and then filed, except 300 more at risk. The only bit still func- form and everybody said that I was stupid that would have been a really good time tioning is its Gatwick Airport . and that I was throwing away money and for lenders to favour liquidation, because Jamie Oliver put four million pounds of his throwing away assets that we could recu- the firm had already turned so much of its own money into it as a sort of super senior perate during the liquidation. Even in really inventory into cash. status loan to be repaid before HSBC’s traditional sectors like diamonds, we are It's a bit of a two-edged sword, but for a GBP37 million loan. seeing new trends and things coming in lot of traditional retailers, seasonality is a threatening traditional retail businesses. Belgium - PT We are not involved in really significant issue. restructuring retail businesses at present. U.S, Illinois – RF David mentioned Canada – FS That’s exactly what hap- This is a little bit unusual since we're Jamie Oliver putting GBP4 million in on pened with Bombay and Bowring. They restructuring other businesses. a senior secured basis. That would be an didn't have enough liquidity in their credit extremely difficult thing to accomplish in line to stock up for their Christmas and sales.

irglobal.com | page 9 Those are two huge seasons for The Gilets Jaunes (yellow vest) pro- • if the company can continue in anybody in giftware, and they just did tests have worsened the situation of some form of reorganised struc- not have enough credit facility to buy many companies in the sector, forcing ture (called a Deed of Company enough goods to stock their stores. the State to proposed accompanying Arrangement); They were very low on inventory, measures. • a sale of the business; or which really affected their ability to The CIRI negotiations are very par- • liquidation of the company, which restructure and if you don't have the ticular and require strong negotiations all parties usually try to avoid. inventory in the stores, you're going skills insofar as French tax and social to fail. The process often involves a reorgani- institutions are rather uncompromising sation or sale of the business to avoid Our firm acted for a few suppliers to in their nature. As a result, solving the liquidation. Toys R Us. As soon as Toys R Us filed, tax and social problems of a troubled we renegotiated our supply contracts retailer is one of the keys to success- This process has happened to many and the terms under which we would ful rescue. well-known companies including Mag- deliver goods. gie T, Diana Ferrari, Gap Australia, England – DF That example of the Esprit Australia, Toys R Us etc. France – YMR Beyond looking for diamond business in Antwerp is quite traditional solutions such as private chilling. Why is the market collapsing Restructure and reorganisation are equity and/or business transfers, there? the name of the game in this space negotiation with the main creditors is because collapse has often been Belgium – PT The main reason is very important. Solutions will emerge brought about by online retail and transparency, driven by a lot of new from these negotiations, that will global raiders, with many brands still terrorism-related and human rights reduce the liabilities owed by a retailer having real value while unable to keep legislation. in difficulty. pace with the online space. There is now more transparency Two opportunities present themselves An arrangement through Voluntary required from people in a market that when negotiations are successful. Administration by Deed of Company was traditionally a non-transparent Firstly, there is the implementation of Arrangement will require approval of sector. Diamonds are only found at a progressive clearance of liabilities creditors, with most creditors’ con- certain places in the world with most with, for example, the implementation scious of the difficulties in the retail in areas ruled by some of the most of a trust to secure the transaction. space, and most hoping to avoid the notorious regimes in the world. Secondly, when the company is no consequences of liquidation. longer viable because of its excessive From a lending point of view, new The lesson learned in Australia is that technological backwardness, suc- stricter EU regulations create more retailers have been forced to develop cessful negotiation allows the sale of requirements around transparency niche product lines as well as compet- the company in order to preserve jobs and identification of those who are ing in the online space. A successful and pay off creditors. behind companies. That started shift- example is Mecca, which has over 80 ing some of the market points, with It should be noted that in France there outlets in Australia and diamonds now going to more struc- is a special negotiation procedure with significant revenue. It is success- tured and transparent companies who with tax and social security creditors fully competing with global brand are playing on these strengths and are governed by the French Commercial Sephora, and growing quickly. willing to give some transparency. Code. All negotiations are done with a unique institution called the Intermin- We have seen a shift to tender com- isterial Comity of Industrial Restruc- panies, who are working to ship and turation (Comité Interminitériel de transfer these diamonds and show Restructuration Industrielle, or CIRI). they have a certificate from the Ant- This body’s efficiency has already werp Diamond Office. We call this the proved its worth and makes it possi- Kimberley Certificate. ble to obtain very interesting results. Australia – JC The story for Australia These creditors benefit from important is much the same, although collapses privileges that confer on them a very here often occur through a mecha- advantageous place in the ranking of nism under our Corporations Act 2001 creditors by order. Retail was particu- known as Voluntary Administration. It larly affected in 2018, a year in which is a process where the directors (and CIRI handled 11 retail cases, eight of in some instances secured creditors) which were new referrals. may appoint an independent person (an insolvency accountant) where the company is insolvent or likely to become insolvent. This is done with a view to exploring:

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SESSION THREE - LIQUIDATION In the event of liquidation, what are some of the challenges specific to retail in terms of asset disposal?

Australia – JC Upon liquidation, there is very little for creditors, Auctions have a role sometimes, but you've got to be careful about because most stock is secured by general securities, helped by knowing you’re getting the true value from a sale. suppliers or financiers. There is little, if any, value in taking over Managing the portfolio is obviously key. We have many large retail premises. Even then, landlords will need to provide consent and that firms that are looking very hard at what leases are coming to an end will not be forthcoming. and how they can divest themselves as quickly as possible of that There are also many other complex issues including gift cards and part of their portfolio. security disputes. These problems, encountered with little or no Larger landlords such as Intu have certainly pushed back against return in the liquidation space, drive sale or reorganisation, provided a lot of reductions coming from company voluntary arrangements, those options are available. regarding them as unfair and possibly damaging in the future. U.S, Illinois – RF When large retailers go out of business and hun- Belgium – PT The problem with retail bankruptcies is that, as a dreds of lease locations become available simultaneously, it creates receiver, it’s very difficult to get value out of it these days. a glut of real estate that exceeds the market’s ability to absorb it. Seven or eight years ago, when retail companies went bankrupt, With Toys R US, there were owned stores that were subject to other competitors on the market were seeking to take over the lease, mortgages and were being sold to end users or financial buyers. because of the good location. They were willing to pay significant The banks that held the mortgages on everything had to make a amount for the possibility of taking over the lease. decision on a store-by-store basis about whether they should hold the store for a while, hoping the market price rebounds, or sell, take Today, we get zero euros for taking over leases and we get really the cash and run. poor results on the sale of the assets of retail companies. This is a trend that we are seeing across Belgium. In the specific part of the Toys R US case that I was involved with, there were at least a hundred and twenty-five stores in the sale. Only France – YMR Judicial liquidation in France is the final step when about 15-20 of the locations were sold to third parties and ended up recovery is clearly impossible. Asset disposal is a very important taking the rest of the properties themselves to manage and sell over issue as retailers usually hold a large amount of stock. time at the lender's leisure. Either the sale of the company is possible and the buyer must take That was going on simultaneously with about 600 leased stores over a substantial part of the stock, or a sale of individual assets is being given back to the landlords. This created an unbelievable set up by mutual agreement or by auction. amount of available real estate in US malls around the country, with The main aim is to sell stock for a fair price, often lower that outlets not enough users who wanted to pay that kind of retail lease price prices, in order to compensate for the damage suffered by employ- for property. ees. That is the case with the liquidation of Sonia Rykiel. Many of these spaces are now being used in completely different ways than they were ever used before, at rents that are much lower than what those landlords were able to extract in a traditional retail market. The leases present a particularly complex problem for the parties that are trying to realise value from them.

Canada – FS I'm working on a matter right now, which is typical from a landlord’s perspective.

We're acting for a law firm here in Canada that is going into dis- illusion. The offices look just like any typical law firm offices look like here in Canada, where the lawyers all have typical offices with windows and the staff work on the interior of the office.

It’s a big space, but the landlord cannot re-lease it to another law firm because nobody wants space that looks like an old law firm anymore. It is proving very hard to get value out of leased premises without taking it back to base building and recreating new premises that look totally different.

England – DF A lot of the companies in the UK have got space that first came onto the market in the 1960s and 1970s. Fundamentally, they are fairly ugly functional buildings that it is hard to do too much with. irglobal.com | page 11 irglobal.com | page 11 Robert Fishman pictured at the 2019 IR 'On the Road' Conference in Chicago Virtual Series | The Retail Apocalypse

Contacts

UK HEAD OFFICE KEY CONTACTS CONTRIBUTORS

IR Global Thomas Wheeler Philippe Termote (PT) The Piggery Founder LIGE ADVOCATEN – Belgium Woodhouse Farm [email protected] irglobal.com/advisor/philippe-termote Catherine de Barnes Lane Rachel Finch Yves-Marie Ravet (YMR) Catherine de Barnes B92 0DJ Channel Sales Manager Ravet & Associés – France Telephone: +44 (0)1675 443396 [email protected] irglobal.com/advisor/yves-marie-ravet www.irglobal.com Nick Yates Robert M. Fishman (RF) [email protected] Editor Fox Rothschild LLP –U.S, Illinois [email protected] irglobal.com/advisor/robert-m-fishman

S. Fay Sulley (FS) Torkin Manes LLP – Canada East irglobal.com/advisor/s-fay-sulley

James Conomos (JC) James Conomos Lawyers – Australia irglobal.com/advisor/james-conomos

David Foster (DF) Barlow Robbins – England irglobal.com/advisor/david-foster

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