That's what happened to both electronics retailer Circuit City Stores Inc. and Linens Holding Co., parent of housewares purveyor Linens 'n Things. In the case of Linens Holding, the company had its bankruptcy case converted from a Chapter 11 to a Chapter 7 case in 2010, because it did not have sufficient liquid assets to fund a Chapter 11, leading to the retailer's liquidation.
As for Circuit City, not only did it not have enough cash, but it lost out on debtor-in-possession financing it had arranged after missing several milestones or breaking several covenants, including failing to obtain junior financing and not hitting certain revenue targets.
And if J.C. Penney realizes it is going to have to file for bankruptcy, it needs to have a plan on how it will emerge already formulated before it files, the industry banker said. Companies that do not have a plan when they file often get liquidated, because there is not enough time after filing to put together a plan.
Plus because of changes to bankruptcy law, retailers have 210 days to reject leases, effectively limiting the time to actually come up with a plan to four or five months, the banker said, which means they can run out of time. Circuit City said a major factor in its liquidation was that 210 days was not enough to determine which leases to reject.Tawil said, however, that Circuit City did not have a plan for its real estate when it filed for bankruptcy. He said a retailer must know which stores it plans to close and which stores it will keep open before even filing. While J.C. Penney is likely to make it through this holiday season, if it were to wait until December 2014 to file, Tawil said, it could be too late. Instead, the struggling retailer should take a lesson from AMR Corp., parent of American Airlines, and file early so that it has enough cash, and therefore leverage, to reorganize and emerge from bankruptcy at least somewhat intact. AMR, he said, surprised everyone by filing much earlier than expected while it was still flush with cash. And J.C. Penney may have few alternatives to filing for bankruptcy.
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