Monday, November 10, 2008

Circuit City turns to Chapter 11

First they announce store closings. Now bankruptcy, albeit Chapter 11 for the time being. Is that the whole story?

The interrelationship is more than meets the eye from the wire stories. There is definitely a real estate component to this filing.

When they announced the store closings, the question you had to ask was: how? Do the leases for the closing stores have termination rights? Landlords aren't just going to walk away smiling. A retailer with the clout of CC usually negotiates a "go dark" provision that allows the store to close but you still have to pay rent.

But under Chapter 11, the retailer can reject the leases it does not want and walk away. See this from the press release:

Under the protection of Chapter 11, the company plans to build on these recent restructuring initiatives. Through the additional flexibility that the bankruptcy process provides the company to restructure its operations, the company will continue its real estate rationalization by taking immediate steps to reject the leases at its previously closed locations. Further, as part of its restructuring efforts, the company will continue to assess the productivity of all assets, review additional cost-cutting initiatives and explore strategic alternatives to maximize the value of the business.
I also noted that company believes it will have cash for unsecured creditors, making the dirt angle even more credible. Now the question is whether this company, which has been battered by Best Buy, will make it even with this restructuring. Let's hope so.

UPDATE: Deal Junkie makes an excellent point about the inflexibility of the CMBS market in this post.

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