An echoing cry for help

It is no wonder that financial restructuring firms have been besieged with requests for help, as troubled retailers and landlords attempt to stave off bankruptcy or cushion the blow if a filing becomes inevitable.

Hilco Real Estate advises companies on which stores to close, and combs through its database of thousands of names to market the leases of the abandoned stores to wring value from the underperforming locations. Northbrook, Ill.-based Hilco helped Linens 'n Things close 371 stores, and Circuit City, more than 700 stores.

Besides helping firms restructure, Hilco can arrange for liquidations before or during bankruptcy. Advisers can search for a new lender or steer a company away from costly mistakes, such as inadvertently violating loan covenants and triggering punitive actions by a lender.

“In the last month alone, we've had seven new accounts,” says Greg Apter, president and principal of Hilco Real Estate. “All seven are pre-bankruptcy, because everybody's so worried about going into bankruptcy.”

The fate of landlords and retailers is interwoven. Retailers buffeted by waning consumer demand face a real threat of inadequate financing during and after a bankruptcy. Hilco recently launched a program to help companies avoid bankruptcy and liquidation. Too many firms can't recover from Chapter 11, Apter says. “They are unable to emerge, or able to emerge for only a short period of time.”

Taking their medicine

Under pressure from lenders, suppliers and other creditors, retailers are taking bitter pills to avoid or cushion a bankruptcy. The measures vary from pleading for reductions in rent to lopping off weak segments of their operations.

Landlords, in turn, are granting painful concessions such as lower rent, which reduces their income streams but may make the difference between losing and keeping an ailing tenant.

An overriding factor in recent bankruptcy cases is that too many retailers are being crushed by debt. “Because there was so much liquidity in prior years, we're finding that many of these companies leveraged their balance sheets to the hilt. There's no cushion,” notes Bill Lenhart, director of business restructuring services at BDO Seidman. He has aided debtors and creditors in bankruptcy cases, and has been a court-appointed examiner.

Some retailers were bought by private equity firms, which over-leveraged them. Still, too many retailers paid high prices for their inventory, which they later couldn't sell as consumer demand slowed. When credit was easier to obtain, many retailers expanded unwisely, borrowing against store leases and brands.

Retailers can auction the leases of underperforming stores or borrow against leases for healthier locations. Retail leases are often considered assets in a bankruptcy case because they can be sold or assigned. But many retail chains are over-leveraged and have no leases or name brands left to borrow against when they need emergency capital to restructure.

However, as property values fall and rental rates decline, many leases are considered overvalued and find no takers at a lease auction. In a normal market, retailers sell the leases when they shut down unprofitable stores.

Brand names are considered intellectual property, and retailers at times can borrow against them. Hilco and a partner bought the rights to the Linens 'n Things name and plans to relaunch the store brand by this spring.