We Must Keep Our Retailers Out Of Bankruptcy Courts

Furniture Today, June 15, 2009

By Edward Borowsky, CEO — Triad Turnaround Group

Wouldn’t it be nice to be Goldman Sachs?

Wouldn’t it be nice to have Timothy Geithner, Henry Paulson or Larry Summers serving on one of our many industry boards? Then, perhaps, the home furnishings industry would be swimming in federal bailout money instead of drowning in debt. No such luck.

Our situation leaves us with one viable option and that is to pull ourselves up and pull off what the Feds have been expecting from the banking industry in return for all of those billions of TARP dollars – the extension of credit to keep small businesses afloat.

Manufacturers and lenders are in a tough spot when it comes to the extension of credit. They deserve to have their debts paid off, in full, with interest. After all, none of us is running a non-profit. On the other hand, if they call in all of their debt at once, our industry will implode. Retailers will call the liquidators and creditors will be left with mountains of bad debt, involuntary write-downs and a lost account. Ultimately, only the bankruptcy attorneys will walk away with any change in their pockets.

We need a radical re-thinking that focuses more on restructuring retail accounts rather than the shuttering of operations, because in the cyclical nature of economics, their demise is our demise. So, how do we pull off the turnaround of our retail businesses and, ultimately, our industry? We must collectively take a risk in our retail clients to keep them out of bankruptcy court. Not because it’s a nice thing to do, but because its in our own best interests.

In a restructuring scenario, risk for unsecured creditors takes the form of a temporary set-aside of a retailer’s debt obligations to allow them to order new merchandise and give them the time to let a turnaround take effect. This may sound radical, but if certain elements are in place in the business, the risk of a set-aside becomes significantly mitigated. If the business has goodwill in the community, a favorable competitive landscape and competent management, chances are it can re-organize.

But the retailers have to do the heavy lifting by opening up their books to the creditors and an ad hoc committee of experts without fiduciary claims on the business to assess operations and debt obligations and determine which underperforming assets, formats and operational shortcomings are bringing down the bottom line and need restructuring.

In return for this transparency, the creditors can temporarily restructure the debt and allow the retailers to breathe. No turnaround is possible without the support of the creditors and, of course, the process needs to be a transparent as Saran Wrap. But cutting off terms and cutting out risk almost always leads to an outcome that is already known and very unpleasant – those day-glow yellow GOB signs in front of our retail client’s stores.

On a macroeconomic level its important to remember that the market is decimating every retailer right now – which creates opportunity for those who can weather the storm. History shows that the time immediately following a bubble burst is the best time to grab market share. If a restructuring is pursued with intelligence and discipline, the trade-off for creditors is simple – replacing bad debt and lost customers with recovered debt and on-going accounts.

I have hope. We can get out of this economic malaise if we all work together for our common interests. And, as a backup, I’ve placed a number of calls to Larry Summers. If he ever returns those calls, maybe I can convince him to sit on one of our industry boards.

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