NEW BANKRUPTCY RULES COULD INCREASE BORROWING COSTS

Mark Hamstra

NEW YORK -- Some retailers could see the price of borrowing rise in the coming months as new bankruptcy rules take effect, analysts said.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which becomes effective on Oct. 17, contains provisions that could make it more difficult for bondholders to collect from bankrupt retailers, the analysts said, possibly driving up the costs of borrowing for some supermarket operators whose debt is considered high-yield.

"The unsecured bonds of a company that is reliant on vendor financing and that rents a lot of their properties are at a much greater risk," said Victor Consoli, director of high yield research and credit strategist, Bear Stearns, New York.

In a report issued by Bear Stearns last week, Consoli outlined the new risks for bondholders under the revised bankruptcy code.

"Debtors will have less flexibility to defer some bills, it will be more difficult to close stores and reject leases, and suppliers will be able to seize inventory more readily," he wrote.

"The potential implications of the act are likely to be lower recoveries for unsecured bonds in a handful of sectors. We can see higher prices being paid for default protection over the coming year and steeper credit curves for supermarkets, drug stores, retailers and restaurants."

For trade creditors, however -- those companies that supply supermarkets with product -- the reforms appear to position them better to receive payment in full for their outstanding receivables. Suppliers will be guaranteed to receive payment in full for product shipped in the last 20 days, and claims for goods shipped in the last 45 days will be given priority over the debtor's other obligations.

"All of a sudden those claims that had been on equal footing with bonds will take priority," Consoli said in the report. "All of a sudden trade claims leap ahead of the bonds."

Although lenders to the nation's largest supermarket operators probably have little to worry about, analysts said, some smaller, highly leveraged chains could see less favorable terms in their bond offerings as lenders take into account the provisions of the new laws.

"Will this affect borrowing rates? The answer is yes," said one analyst, who asked not to be identified. "The changes could definitely have an impact on companies that use a significant amount of trade credit."

Companies that could be affected include Pathmark Stores, Ingles Markets, Roundy's Supermarkets and Marsh Supermarkets, the analyst said.

Consoli told SN that investors will likely factor the increased risk into their formulas when examining the risks of supermarket debt. Currently the industry standard is to factor in a possible recovery through bankruptcy of 40 cents on the dollar, he explained.

"In this new structure, I think you are at greater risk of being substantially lower than that," he told SN.

In addition to giving higher priority to repayment of trade creditors, the new rules also include provisions that restrict the time allowed for retailers to reject leases. With that span reduced to seven months -- 120 days plus a 90-day extension -- retailers may be inclined to hang onto unprofitable locations for a longer period of time, Consoli said.

"If you are managing hundreds or thousands of stores, and you are scrambling to decide what to do, you are going to err on the side of inclusion, and say, 'I'm going to assume these leases, and I'll reject them later,"' he said.

That could end up causing retailers to invest their limited capital into stores that will never see a return, he said.

According to James McTevia, managing member of McTevia Associates, a turnaround specialist based in Bingham Farms, Mich., there are four key components of the new bankruptcy legislation that will have the biggest impact for retailers:

- The period of exclusivity for filing a plan of reorganization has been limited to 18 months. "After that, any party of interest can file a plan," he said. Previously, judges had often granted multiple extensions in filing their reorganization plans.

- Retention bonuses will be limited. "In the past, the courts have awarded excessive 'stay' bonuses," he said. "Under the new law, that is not possible."

- Courts will be required to appoint a trustee to oversee the case if there is any indication that officers and management participated in giving misleading financial information to investors.

- There will be increased scrutiny of the claims for fees filed by the consultants and other professionals that are retained by companies in bankruptcy.