Getting Through the Retail Bankruptcy Minefield

​We all know that extending credit to retailers is treacherous. A large retailer in chapter 11’s 5.65% bonds were trading at 94% as recently as March 12, 2020. Then COVID19 lockdowns forced the company to shut all its stores and file for chapter 11 bankruptcy two months later. Those bonds are trading at 1% today. Cherokee Acquisitions has created Claims Put Market to help vendors protect their accounts receivable. Cherokee Acquisitions is an investment banking firm focusing on claims, vendor put options, and receivables finance.

What is not as well-known is how risky it can be to extend credit to a retailer after it files for chapter 11 bankruptcy. Conventional wisdom held it was reasonably safe to ship on terms to a retailer in bankruptcy, since retailers are able to obtain new money from a Debtor-in-Possession loan. Additionally, bankruptcy law gives post-petition creditors “administrative expense” status that ranks their claims higher in priority than general unsecured claims.

The recent Toys R Us bankruptcy was a rude awakening that showed just how risky it can be to ship to a retailer in bankruptcy, even if it has obtained new money from a Debtor-in-Possession loan. Vendors to Toys were owed $800 million mostly from shipping to Toys after the bankruptcy had commenced. The vendors relied on their status as administrative expense priority creditors as well as the cash proceeds from Toys’ Debtor-in-Possession loan for payment. In March 2018, Toys decided to wind-down its business and liquidate. Cash proceeds from the liquidation, after partially paying down secured debt, left only 23% to pay priority unsecured vendors. This represents a loss of over $600 million for vendors beyond getting wiped out on their pre-petition unsecured claims.

Toys is not an isolated case. Sears liquidated and paid less than 29% to vendors holding administrative expense priority claims after wiping out pre-petition unsecured claims. Forever 21 vendors are likely to suffer a similar fate.

So what’s a vendor to do? Traditionally, factoring firms like CIT would purchase post-petition receivables and take on the risk of a potential chapter 7 liquidation. Credit insurers such as Euler Hermes might also insure vendors against chapter 7 liquidation risk. However, in a COVID19 world, traditional factoring firms and credit insurers have sustained large losses and their support might not be available.

Vendor Put Options are a good way for vendors to obtain protection from either a customer’s chapter 11 bankruptcy, or an already bankrupt customer’s chapter 7 liquidation. In exchange for an option fee, the vendor purchases the option to sell its receivables subject to a potential bankruptcy reorganization or liquidation to an investor. The option is non-cancellable for the requested term. The best way to obtain a Vendor Put Option is through Claims Put Market, the only online marketplace connecting vendors with large hedge funds. The benefit of Claims Put Market to a vendor is that their requested put option is shown to multiple investors that are competing to offer the best price. Claims Put Market also uses simple legal documents and a transparent market structure.

Should you have any questions or require additional information, feel free to contact Vladimir Jelisavcic at 212-259-4305, or

Source: Cherokee Acquisitions