KPMG Corporate Finance

Current State of the Market

The current credit crisis and a potentially prolonged economic recession have pushed an unprecedented amount of companies into financial distress. In response to this unprecendented environment, our Special Situations Advisory Group and Real Estate Services team are working together to guide companies through these challenging times, offering a broad range of services to help improve liquidity. Our team of experienced bankers can assist a company in deleveraging its balance sheet, repositioning its real estate and lease portfolio, closing under-performing locations, and mitigating its leasehold liabilities.
 
The following case studies are real examples of how our special situations and real estate professionals work closely with clients in a meaningful and impactful way to address the current economic challenges.

  Case Study # 1: Firecracker
  Our client is a large public retail business, with revenues over   US$4 billion. The company is facing a significant debt maturity in the   third quarter of 2009 and is challenged given that the capital markets are   "frozen" and even the very best companies are having a very difficult time   raising capital. The company is undertaking efforts, at an emergency   pace, to reduce its costs and to refinance or self-fund the debt maturity.   We have been engaged by the company to develop and implement a   cost reduction plan related to the company’s occupancy costs. In   particular, we are executing on a rent renegotiation program in which   over 30 KPMG Corporate Finance professionals organized into   7 negotiating teams are negotiating with landlords of over 2,000 retail   leases.

  Case Study # 2: Southcoast
  Our Client owned and operated an 88-room Holiday Inn Express Hotel &   Marina property with excess land and improvements located in   Fairhaven, Massachusetts. Due to overexpansion by the operator and a   decline in the local market, the Company was forced to file for bankruptcy   protection. The Company continued to operate its business and manage   its properties as debtors-in-possession until a Chapter 11 Trustee was   appointed. We were retained by the Trustee to identify prospective   buyers and maximize the value of the businesses and underlying real   estate and assets. We conducted an aggressive marketing campaign to   investors, operators, and developers. As a result, a US$5.1 million   stalking horse contract was executed and the assets were subsequently   marketed for higher and better offers. An auction was conducted with   the stalking horse buyer and other competitive bidders where a final sale   price of US$6.5 million was attained.

  Case Study # 3: Brueners Home Furnishings
  Our client operated a retail furniture and home furnishings chain with 47   locations nationally. In an effort to take advantage of the owned locations,   we were engaged to undertake a sale-leaseback transaction. After we   marketed the opportunity we received over 10 offers. We negotiated a   contract with one of the buyers and a transaction closed for both   properties for US$17 million. Approximately 3 months after this   sale-   leaseback assignment  was completed, our client filed for bankruptcy.   Unable to secure appropriate financing to continue as a going concern,   we were again engaged to market the 40+ leases for sale as part of a   bankruptcy auction. We undertook a marketing plan that lasted   approximately 60 days. We reached out to virtually every furniture chain   nationally along with other retailers with similar space requirements.   During our marketing process, the debtor received an offer from a   liquidator to pay US$5 million for designation rights on the portfolio. Our   client was inclined to take the offer and the bank involved also believed   the debtor should take the offer. Based on the response we were   receiving in the marketplace from likely bidders, we suggested that the     US$5 million was not going to be the best deal and advised our client to   consider conducting an auction of their locations. At the conclusion of an   approximate 15 hour auction, the leases were sold to a number of   bidders for a combined price in excess of US$14 million.


In addition to lease negotiations, companies should evaluate one or several paths toward preserving value and creating liquidity. These include:

  Companies should evaluate one or several paths toward preserving value   and creating liquidity. These include:
 Creating liquidity   Debt restructuring:
  • Negotiate with lenders to explore all   opportunities to extend deadlines and increase   availability. “Deleveraging” should be your mantra.

  • Negotiate with landlords to explore all opportunities     to restructure leases, including lease terminations,     rent reductions, term modifications, size     reductions, subleases, and assignments.

  • Negotiate with trade creditors to explore all     opportunities to enhance liquidity by extending     terms, consolidating vendor relationships, and     considering debt-for-equity swaps.
  Capital raise   • Confidentially seek financial and strategic partners     domestically and internationally.

  • Confidentially seek alternative financing sources
    with more patient capital during this market cycle.

  • Monetize real estate via sale-leasebacks.
  Acquisitions
  or disposals		   • Confidentially explore opportunities either to sell all
    or a portion of the business, or to acquire
    strategically complementary businesses.

  • Market and dispose of excess owned and leased     properties.
  Cash   management   • Implement a third-party analysis of your operations
    to identify cost rationalization and enhanced
    cash flow management techniques.
  Real estate   auctions   • Create liquidity through the use of accelerated
    marketing; sealed bid and open auctions. A 6 to 10
    week process provides a time-definite cash sale,
    fixed, noncontingent terms, and predetermined
    marketing and holding costs.

  • Consolidate the sale of 12 to 18 months of inventory,
    by dominating your market share.

  • Create opportunities to reposition financing, driven by     increased sales.

  • Sell in bulk or to the retail marketplace.

 

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