Financial Transparency Needed in Challenging Times
By Tom Ryan
With rumors flying daily,
retailers need to be more forthcoming in providing details of their financial
condition to vendors. This is particularly important as these rumors can
push a retailer into bankruptcy court and it’s become virtually impossible
to reorganize in Chapter 11 bankruptcy protection.
That’s the view of veteran
bankruptcy lawyer Larry Gottlieb, who spoke on Wednesday in Newark, N.J.
at “The State of Retailer: A Financial Perspective,” a seminar
sponsored by the Vendor Compliance Federation (VCF) and Trade Promotion
Management Associates (TPMA).
Mr. Gottlieb, of Cooley Godward Kronish LLP,
said that well beyond monthly sales statements, retailers should be providing
monthly P&L statements and frequent details on borrowing rate availability
and loan covenant compliance measures. Conferences with vendors should
be held regularly and secured websites should be set up to provide vendors
with easy access to up-to-date financial info.
The increased access
to information, according to Mr. Gottlieb, should come from both those
retailers with solid as well as questionable credit because the financial
crisis and poor economy has increased retail’s overall exposure to bankruptcy.
“Think about the
number of retailers you have concerns about today that you would have never
believed would have been at risk just six months ago,” suggested Mr.
One primary reason retailers
should provide greater financial information is to avoid bankruptcy at
any cost. That’s because amendments to bankruptcy laws enacted in October
2005 over the treatment of leases have made it nearly impossible to reorganize
in bankruptcy proceedings.
Bowing to pressure from
landlords, the new laws gave bankrupt retailers seven months to assume
or reject a lease versus a fairly unlimited time period previously. Since
their primary collateral is the inventory in the stores, banks are increasingly
worried about maximizing going-out-of-business sales in the tight, seven-month
time frame, according to Mr. Gottlieb. Essentially, banks are giving retailers
two months to sell the business. If unsuccessful, the third month is spent
filing the motion to run GOB sales that commence over the next three
months. As a result, banks are no longer offering reorganization as an
“It’s a problem,” said
Mr. Gottlieb. “As long as that amendment exists, we will not reorganize
any retailer in any way.”
The other reason retailers
should open their books for vendors is because speculation is increasingly
likely to push a retailer into bankruptcy proceedings. Given anemic retail
sales and banks slashing borrowing availability, vendors have grown
nervous about the prospect of being left with huge unpaid and essentially
worthless bills in bankruptcy court. Without adequate communication in
today’s climate, Mr. Gottlieb said trade credit can quickly dry up.
“You can’t allow
the rumors to start,” said Mr. Gottlieb. “That rumor mill soon
becomes a runaway freight train that can’t be stopped.”
Do you agree that retailers need to be more forthcoming in providing
financial information to their vendors? What more can retailers
do to shore up trade support?