A One-Day Ch. 11 Turnaround? Belk Shows It Can Be Done
Kirkland partners Steven Serajeddini and Josh Sussberg spoke with Law360 regarding client Belk Inc.'s pre-packaged, one-day restructuring.
In what the Texas judge presiding over the case called a "remarkable" achievement, southern department store chain Belk Inc. pulled off a rare one-day Chapter 11 restructuring following months of prepetition negotiations with stakeholders to avoid the costly disruptions common to retail bankruptcies.
Belk received court approval for a $450 million reduction in its secured debt load and obtained $225 million in new financing during a hearing that took place less than 24 hours after it filed for Chapter 11, all while unsecured creditors were unimpaired. But according to the architects of that plan, the brief hearing and short stay in bankruptcy were only possible through a process that began several months ago.
"What it comes down to is a motivation by the parties at the table and a willingness to see the value that's there," Belk attorney Steven N. Serajeddini of Kirkland & Ellis LLP said. "The lenders here recognized from the beginning that a long, drawn-out bankruptcy would be value-destructive. The parties wanted to work together to find a restructuring that made sense."
Beginning in November, Belk engaged with its majority equity owner Sycamore Capital Partners on the framework for a debt-for-equity swap and new capital infusion that would keep Sycamore in control of the company while secured lenders would obtain a larger minority stake. By late January, the company announced a restructuring support agreement that had the support of more than 75% of its secured lender classes and began an even more vigorous effort to bring everyone on board.
By the time of its Feb. 23 petition filing, the company had unanimous consent for the plan and was able to go into effect the next afternoon following approval from U.S. Bankruptcy Judge Marvin Isgur.
"It was an all-hands-on-deck effort led by the management team and supported by their advisers to build understanding and consensus about what was being done," Serajeddini said.
Belk joined only a handful of other debtors that have been able to confirm and execute a Chapter 11 restructuring on such a rapid timeline, and completed the fastest case in modern bankruptcy history at about 16 hours from filing to effectiveness, besting the case previously considered to be the fastest on record by about three hours. To get there, Belk had to take advantage of aspects of the bankruptcy code that allow a debtor to formulate a restructuring plan and then solicit votes from impaired creditors before the filing, coming to court with a prepackaged plan of reorganization, or a prepack.
Having a plan in hand with the support of impacted parties allows a debtor to move through court quickly while minimizing the costs of the Chapter 11 process, according to bankruptcy experts.
Laura Davis Jones of Pachulski Stang Ziehl & Jones LLP told Law360 that the lightning-quick nature of modern prepacks keep debtors from incurring the large administrative expenses associated with bankruptcy cases while virtually eliminating any operational disruptions for a business.
"It makes the bankruptcy almost invisible because you are in and out before anyone even knows about it," Jones said.
Prepacks are different from a prearranged case where a debtor comes to court with the framework for a plan that is agreed to by large creditor constituencies, but has not yet been solicited for votes from impacted creditor classes. A typical prepack takes a few weeks to get to confirmation, but faster trips are possible.
For large, complex retail operations like Belk, it is paramount that unsecured and trade creditors — including vendors and landlords — are not impacted by the proposed plan because disputes about the treatment of those creditors can be time-consuming and costly. Amy Zuccarello of Sullivan & Worcester LLP said landlord obligations can be particularly burdensome if a company lingers in bankruptcy too long.
Once a company files for bankruptcy, administrative rent obligations begin to accrue. With a large and diverse stable of landlords, Belk would incur significant rent liabilities if it stayed more than a day in Chapter 11.
"It's definitely an incentive for an operator like Belk to stay out of bankruptcy as long as possible and put as much time and effort into putting together its restructuring plan without allowing administrative rent to accrue while it's negotiating," Zuccarello said.
Those negotiations before filing could include rent concessions or forbearance agreements with landlords, and Zuccarello said the Belk's prepetition efforts allowed unsecured creditors to be paid in full in the ordinary course of business or to ride through the case unimpaired.
"Belk appears to be the kind of case that was done with a lot of thought ahead of time," she said. "It's not fair to call it a one-day case because the work done ahead of time to make sure it went smoothly was pretty extensive."
Joshua A. Sussberg of Kirkland, who also worked on Belk's counsel team, said it takes time to bring all those interests in alignment, and it also takes vigilant management to realize action needs to be taken. He credited Belk's leadership team for pursuing a restructuring while there was still liquidity to work with, saying many retailers make the mistake of waiting until "the shot clock has expired" to start addressing their issues.
For Belk, the short trip enabled it to reduce its debt while obtaining new sources of funding, keeping its 291 stores open and preserving the jobs of its 17,000 employees.
Stacy Gray, Belk's senior vice president and general counsel, said the company wanted to get in and out of bankruptcy as quickly as possible to minimize operational disruption.
"Having an expedited, prepackaged, one-day reorganization allowed us to emerge while positioned for long-term growth," Gray said. "That's what we're after as a company. ... For us, having this new cash infusion and a significant reduction of our debt allows us to pay all of our vendors and landlords and also to support our continued investment in strategic initiatives."
The success of prepacks in general but especially cases with extremely short runways depends on many factors, but one of the most critical is the willingness of the court to entertain those tactics. Bankruptcy judges in New York, Delaware and Texas have already shown an understanding for the needs of debtors pursuing short-duration restructurings, making them a preferred venue for lightning-quick cases.
"[Belk] wouldn't have been able to get that result everywhere based on how sophisticated the case is and what other judges are used to seeing and how comfortable they are moving a case that size that quickly," Zuccarello said.
Judges prefer cases that go smoothly, so every minute spent negotiating issues before a Chapter 11 filing can save hours of litigation once in court, according to former U.S. Bankruptcy Judge Kevin Carey, now a partner at Hogan Lovells. Failing to tie up loose ends before appearing before a bankruptcy judge can be frustrating for the court.
"Occasionally, when I was on the bench, I'd get a prepack that was half-packed, where an objector comes out of the woodwork and objects," Carey said. "Once you get into court and you have your ducks in line, judges always like parties who have prepared well for their filings and addressed objections before they get to court."
Rapid restructurings aren't a cure-all for every debtor and come with their own drawbacks, however. They are only a viable option for certain types of companies that are trying to complete a financial reorganization, according to Lucian Murley of Saul Ewing Arnstein & Lehr LLP.
"It's an incredibly powerful tool and it makes an awful lot of sense in a lot of cases, but it's not a panacea for all troubled businesses," Murley said.
Specifically, the nature of prepacks precludes a debtor's ability to address any structural issues with the business aside from its debt stack, he explained. The code requires notice be provided to creditors and other stakeholders before their rights are impacted, meaning for some debtors — notably, retailers — eliminating burdensome leases or rejecting vendor contracts is not an option if a super-accelerated case is planned. Though a debtor can emerge with a reduced debt load and new financing in less than a day, if it still has fundamental flaws, a return trip to Chapter 11 isn't out of the question.
"If the business's only issue was its balance sheet, then great, the prepack has done what prepacks do best," Murley said. "But if there are significant operational changes that need to happen for a business, there are many tools in the bankruptcy code that can assist a debtor."
Concerns about the due process afforded parties to a prepackaged plan were at the forefront of Belk's proceedings last week, with Judge Isgur crafting an order during the hearing designed to protect the rights of creditors post-confirmation. The order created a short period for unsecured creditors to opt out of the release of claims included in the plan, and to raise any objections to the plan a creditor may not have realized it had during the brief pendency of the case.
Jones said due process issues can usually be alleviated by virtue of the fact anyone whose rights are impaired will be paid in full or ride through the case with their claim unimpaired.
"As long as these are the cases where the operational creditors are going to be unimpaired, it's no harm no foul," Jones said. "It's a win-win for everyone. The parties that have negotiated to make the company come back and make sure it can operate are very much involved in the process. The folks that have not received advanced notice are not going to be impaired at all."
The frequency of short duration cases like Belk has increased over the past two or three years, but these types of proceedings are still a rarity in the bankruptcy space, according to Alissa K. Piccione of Troutman Pepper. She cited two cases from 2019 that confirmed plans in less than a day — women's clothing retailer FullBeauty Brand Inc. and information technology firm Sungard — as the previous record holders for fastest restructuring at 20 and 19 hours, respectively. Swift cases will become more frequent and possibly a bit faster as the option for a lightning-fast case becomes more viable.
"This is something practitioners have been talking about for years and is only now coming to fruition," she said.