Hudson's Bay store in Toronto on March 10.Chris Young/The Canadian Press
An agreement that would give Hudson’s Bay Co.’s senior lenders greater control over its restructuring is a “Trojan horse,” which compromises the retailer’s ability to save even part of the business, a lawyer for one of the Bay’s key landlords told a court hearing on Thursday.
It was the second day of arguments over a proposed “restructuring support agreement” between the retailer and the lenders – Bank of America N.A., Pathlight Capital LP and Restore Capital LLC. If approved by the court, the agreement would impose restrictions on Hudson’s Bay as it liquidates the majority of its department stores, while attempting to develop a plan for its future. But others urged the court not to approve the deal.
“What you have before you offers no benefit at all to HBC,” said David Bish, a lawyer with Torys LLP representing Cadillac Fairview Corp.
The restrictions include a requirement for Hudson’s Bay to abide by a budget during the process, which it would have to submit to its lenders on a weekly basis. And the agreement also would require Hudson’s Bay to demonstrate that it has the reasonable prospect of a restructuring plan – such as an expected deal to sell part of the business – by April 7. Otherwise, the six stores that have so far been left out of liquidation would also begin clearance sales on April 8.
At the first hearing to consider the agreement on Wednesday, a lawyer for Hudson’s Bay acknowledged that the agreement was “not a very satisfying outcome for the company,” but said that it would prevent a protracted fight with its lenders.
Lawyers for the lenders argued on Wednesday that the agreement was needed in part because while Hudson’s Bay is attempting to find a plan for restructuring, it is spending cash keeping stores open and using inventory over which the lenders have a security interest. The lenders’ counsel argued this disadvantaged them, because it potentially eroded the retailer’s ability to repay them.
“That is a complete fiction,” Mr. Bish said on Thursday. Even if Hudson’s Bay proceeded with a complete liquidation, it would incur the same expenses to operate the stores, he said.
The lenders have said that in the absence of the agreement, they would seek a court order to put the company in receivership. Mr. Bish called this a threat to “blow up the company,” but said that threat was hollow, partly because the court could decide not to grant such a motion.
Cadillac Fairview – which is HBC’s landlord at 16 locations, including some of those that have been left out of liquidation for now – was not alone in objecting to the agreement. Lawyers for a number of other landlords, such as RioCan Real Estate Investment Trust, Oxford Properties, KingSett Capital, Morguard, Cushman & Wakefield and others, have also opposed the agreement.
Hudson’s Bay received court protection from its creditors on March 7, under the Companies’ Creditors Arrangement Act. The Globe and Mail was first to report that the company initially had a plan to save roughly half of its 80 Bay stores across Canada. That plan would have required concessions from landlords, such as rent and investments to keep those stores open, which were not forthcoming.
Landlords were not asked to provide emergency loans that provided them security, known as debtor-in-possession (DIP) financing, Linda Galessiere, a lawyer with Camelino Galessiere LLP representing various landlords, said on Thursday. Instead, landlords were asked for what Ms. Galessiere characterized as a “donation” to the company.
After those discussions were unsuccessful, Hudson’s Bay instead received court approval late last week to commence liquidation sales at all but six of its stores. On Monday, 74 Hudson’s Bay stores, as well as two Saks Fifth Avenue and 13 Saks Off Fifth stores, began discounting products for clearance.
Three stores in the greater Montreal area and three stores in Toronto – one of which also includes a Saks Fifth Avenue location that Hudson’s Bay operates under licence with Saks Global – have been left out of the liquidation process for now.
That exemption was intended to provide the maximum chance for the retailer to develop a restructuring plan and potentially find a buyer. Hudson’s Bay has set a time frame to review bids for the business and conclude the sale process by the end of April. It has also begun a process to monetize its store leases as locations prepare to close.
That sales timeline is different than the April 7 deadline proposed in the restructuring support agreement. The lenders are willing to extend that deadline to the end of April if necessary, Linc Rogers, a lawyer with Blake, Cassels & Graydon LLP representing Restore Capital, said during Thursday’s hearing. But he said that in the absence of an agreement, the lenders would bring a receivership application on the court.
“All we’re saying is that would lead to chaos, and a destruction of value,” he said.