16 January 2009

Circuit City's Chapter 18

Circuit City filed for a Chapter 11 reorganization before the Christmas holiday, but poor seasonal sales and the lack of a buyer have forced it to liquidate, something normally done in a Chapter 7 bankruptcy, hence the "Chapter 18," a reorganization that ends up as a liquidation.

The case is yet another illustration of how hard it is for retailers to reorganize under the 2005 bankruptcy law reforms, and bodes poorly for other retailers in reorganization.

I'd be curious to see a post-liquidation analysis. Are creditors better or worse off as a result of the reorganization attempt?


Dave Barnes said...

"Are creditors better or worse off as a result of the reorganization attempt? "

As a participant (aka creditor) in 3 bankruptcies, I love this question.

Andrew Oh-Willeke said...

The issue, Dave, is not whether creditors are better off with a bankruptcy or a non-bankruptcy. In 20/20 hindsight, liquidation through bankruptcy at some point was inevitable.

As a general rule, in big corporation bankrupticies, general creditors do a bit better in Chapter 11 than in Chapter 7, but this often doesn't hold true in smaller cases. Liquidation piecemeal through individual writs of execution by one creditor or another based upon who got to court first, would very likely have been disasterous for most creditors compared to bankruptcy (big bondholders generally have an edge in this scenario). Bankruptcy likely affords a few cents on the dollar in recovery and attorneys fees that are, in the aggregate, small than having individual lawsuits for each creditor until the company's asserts are exhausted (and afterwards until everyone realizes that the company's assets are exhausted). Liquidating outside bankruptcy often means bigger attorneys' fees and no recovery at all for small creditors who attempt to get anything.

Anyway, the issue I am posing is whether allowing Circuit City to stay open through the Christmas season (typically providing the bulk of the year's retail sales) as made the pie bigger or smaller for creditors.

In other words, would creditors have been better of if Circuit City liquidated in late October 2008, or better of with it liquidating in January 2009 after three months of sale in the ordinary course at a peak sales period (presumably with higher prices in the interim than would have been secured in a firesale liquidation but also higher expenses of sale)?

To know this, one would need to have a good estimate of the net proceeds from an October 2008 firesale liquidation, and would have to know how much of a profit or loss the chain made for the three months that it was in bankruptcy.

My guess is that Circuit City made a modest profit in the three months that it operated in bankruptcy, and that it would have done significantly worse in a fire sale, but I'd like to see numbers to know if I am right.