The other side of retail bankruptcies: vendors have their say - retail store bankruptcies discussed at seminar - Column

Discount Store News, Oct 7, 1996 by Jennifer Negley

There is a classic moment in Westerns when the cowboy presses a seasoned cheek to the ground and discerns through the minutes vibrations in the desert floor that a charging Indian war party is heading in the direction of his encampment.

I, too, have heard the sound of distant thunder. It was stirring in the air at a recent seminar in Chicago called "Exploring Retail Bankruptcy." Sponsored by the National Housewares Manufacturers Association, the Association of Home Appliance Manufacturers, the Cookware Manufacturers Association and Heller Financial, the day-long gathering of vendors was ostensibly, survival guide to reducing bankruptcy losses."

In the early going, audience questions largely concerned how to retrieve inventory after a filing (answer: it's not all that easy) and how to recognize early on whether a retailer is destined for bankruptcy (answer: top management begins to leave; the retailer overhauls its merchandising mix, especially before a big selling season; the company becomes overly picayune about invoice and delivery documentation; payments slow down; comp store sales begin running double-digit declines for months in a row). There was also a how-to presentation about the relatively new industry of selling claims.

But the forum had another, overarching purpose. to gather ideas to be used in rewriting the current federal bankruptcy code.

Congress in 1194 impaneled a commission to study and recommend changes to the code, giving the group a two-year charter. The commission is now midway through its deliberations, and a number of manufacturer trade organizations - including the association sponsors of "Exploring Retail Bankruptcy" - are pulling together to make their recommendations part of that process.

And judging from the comments made by the ceos, cfos and credit managers in the room that day, they are far from satisfied with the contemporary state of affairs. "It seems like a lot of retailers file so they can reorganize and refinance with our money," one angry vendor told the panel of speakers. Another complained. We are in essence providing working financing in the form of inventory," What do vendors want? Here's a sampling of some of the suggestions offered that day. * A company should be required to meet certain baseline criteria before it is allowed to file Chapter 11. * A company should get one chance to reorganize. If the reorganization plan doesn't work out, the company should be barred from entering Chapter 11 a second time. * If vendors are offered stock in lieu of cash payments, the vendors should become the company's majority stockholders. * A retailer should be required to notify on the day of its Chapter 11 filing all companies that will be impacted by the filing. * Vendors should be allowed to reclaim any merchandise shipped within 30 days prior to the filing. (The current code has a 10-day window with a number of restrictions and qualifiers.) * There should be some legally sanctioned form of security for unsecured creditors.

And that's just what they were able to come up with in an hour-long discussion. A handbook raised some other concerns, among them that management gets fat bonuses while creditors remain unpaid" and large banks are walking away with all of the assets while the trade remains unpaid."

The vendors see rewriting the bankruptcy code as a matter of survival. The retail community may be well advised to view the process in the same light.