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Defining the unusual terms of Chapter 11 bankruptcy


Beth Ewen


The “cramdown” is the most vivid word in the bankruptcy lexicon, by a mile, and also the No. 1 reason so many are competing to buy assets out of Chapter 11 proceedings this year. Which end you’re on will dictate how you view it.

Aurify Brands was on the favorable side when buying 50 Le Pain Quotidien restaurants in the U.S. from the Belgium-based parent company in June.

“The beauty of the bankruptcy process is, it enabled us to shed the underperforming stores and focus on the good stores that we wanted, and restructure the leases in a more favorable way,” said John Rigos, co-CEO of the New York City-based Aurify.

In Chapter 11, if a two-thirds majority approves a reorganization plan, “then the other groups of creditors, their objections are overridden and it’s a cramdown on those dissenting creditors,” explained Andrew Stosberg, a business bankruptcy expert at Middleton Reutlinger law firm.

Rigos thinks it’s high time for landlords to adjust their lease terms, not an unusual viewpoint for a restaurateur, especially during the pandemic.

“The one thing that nobody knows is what the near-term future holds. So we approached the landlords to become more land ‘partners.’ The construct is a common one many tenant/landlords are navigating toward,” he said.

Aurify and landlords agreed on a minimum base rent that is lower than the prevailing rate, and then a percentage of sales goes to landlords if the LPQ stores hit a certain threshold. Rigos didn’t reveal the specifics.

“Everybody’s decimated from an economic standpoint because of the crisis. We’re reopening 50 locations, we’re hiring 1,200 people and we’re helping resurrect a once really great brand that’s just had a rough couple of years,” Rigos said about Le Pain Quotidien. Aurify also operates about 60 restaurants under other brand names, including 20 Melt Shops.

Don’t call the purchase a bargain, though. Aurify spent $4.5 million in debtor-in-possession or DIP financing, which seems like nothing for stores with average unit volumes of $1.75 million and three to four times that for the 50 Aurify actually purchased. But DIP is “basically the capital we were lending to the company to enable it to go through the bankruptcy process. Someone needs to be paying the lawyers, the bankers, the accountants,” he said. “Recall, the company had no money, so if we didn’t provide that lender financing, it would have disappeared.”

Now the real spending begins. “There’s a lot of other capital we’re deploying,” he noted, especially to refurbish and reopen stores. “And then there will be six to 12 months of funding losses.”

Stalking horses, retention spiffs

For the first half of 2020, about 3,600 companies filed for Chapter 11 bankruptcy protection, compared to about 2,800 in the first half of 2019. By comparison, Chapter 11s topped 4,000 cases in 2012’s first half and nearly 7,000 in 2009’s, according to the American Bankruptcy Institute.

As filings pile up, many buyers are finding beauty in the process, or at least learning the meaning of other colorful words.

Harbin Pharmaceutical Group, for example, placed a so-called stalking horse bid of $760 million for GNC Holdings, the vitamin and herbal supplements retailer that filed for Chapter 11 June 23. That bid kicked off an auction designed to spur others to make higher bids.

In 2018, Harbin, based in China and the manufacturer of pharmaceuticals, invested $300 million in GNC, with the last tranche received in February 2019, documents said. Proceeds were used to pay down debt.

Prior to filing, the company approved cash incentives for key employees, who can retain 75 percent of the bonus even if the company does not successfully emerge from Chapter 11. Kenneth Martindale, chairman and CEO, received $2.19 million in a retention bonus; Tricia Tolivar, executive vice president and CFO, received $795,000, among others. 

Such payouts cause outrage in the Twitterverse—how can execs get a bonus for going bankrupt, critics ask—but they’re common in large cases, said Robert Haupt, an attorney with Lathrop GPM in Kansas City. He is not involved with the GNC case.

“From a practical point of view, everything that happens in bankruptcy should be designed to benefit all the parties,” he said, adding the intent of such bonuses is: “Very simply, is it worth it to the greater good for the business to retain its management, who very well may start looking for other jobs right now?”

Rather than question a retention spiff, investors might ask why Martindale stayed in his CEO post so long, since 2017. GNC lost some $500 million over the past four years. In mid-May, it reported a $200 million loss in the first three months of 2020. That compares to $15 million in losses in the first quarter of last year.

Don’t call it bankruptcy

With the slogan “Die Fitnesshalle fur Alle” (fitness for all) and a banana for a mascot, Rainer Schaller opened his first McFit gym in 1997 in Wurzburg, Germany. On July 13, his company, Berlin-based RSG Group, emerged as the leading bidder to take over the Gold’s Gym chain, which filed for Chapter 11 May 4.

If approved by the U.S. bankruptcy court, RSG will pay $100 million for Gold’s, with 61 company-owned gyms and more than 600 franchisee-owned units. TRT Holdings bought Gold’s for $158 million in 2004, when it had 555 gyms.

Since joining Gold’s in February 2019, CEO Adam Zeitsiff had been working to refranchise 60 corporate-owned gyms, and had successfully done so with half but then got stuck. Enter the pandemic, which closed all the gyms in March, followed by—well, you know the word. “The filing is meant to jam those 32 landlords who wouldn’t play ball by way of rent abatements/concessions,” is how the newsletter Petition puts it.

We’ll give Zeitsiff the last word on bankruptcy definitions. “I don’t use the B-word,” he said, half-jokingly, in an interview in June. His public relations firm prefers “restructuring through the court process.

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