The Great Atlantic & Pacific Tea Company Inc. has filed Chapter 11 bankruptcy for the second time in five years.
Bankruptcy for A&P
The Great Atlantic & Pacific Tea Company Inc., owner and controller of the 156-year-old A&P supermarket chain, has filed for Chapter 11 bankruptcy for the second time in five years. This marks what some restructuring advisers colloquially call “Chapter 22.”
It seems the company has tentative deals with three other grocery chains for the acquisition of 120 of its stores and 12,500 of its employees for almost $600 million. Additional stores might be sold to additional companies.
According to the company’s attorney Ray Schrock, the company feels, “that’s a real bright spot.”
Without the sales, the chain will have “no choice but to liquidate their business in a fire sale and piecemeal fashion,” said the company’s chief restructuring officer, Christopher McGarry.
History of A&P
A&P was founded in 1859 and claims to have been the first to introduce a supermarket to the U.S. in 1936 when it opened a 28,125-square-foot store in Braddock, Pa. By the 1940s, the company had nearly 16,000 stores.
In 1979, after the Germany-based Tengelmann Group acquired the company, a series of strategic mistakes, changes within the industry, and financial hurdles caused the company to pull back on its offering of services.
Great Atlantic & Pacific Tea Co., which is a division of Montvale-Para Holdings Inc., owns and operates roughly 300 supermarkets and other stores under several brands, including: A&P, Waldbaum’s, SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars, and A&P Liquor.
In the bankruptcy filing, the grocery chain has listed $2.3 billion in debts and$1.6 billion in assets.
Supplier C&S Wholesale Grocers Inc. was listed as its largest unsecured creditor with $39.4 million in claims. The next four largest unsecured creditors include McKesson Drug Co. for $8.4 million, Facility Source LLC for $6.7 million, Coca-Cola Enterprises for $4.8 million, and Mondelez Global LLC for $3.2 million.
The grocery chain listed 28,500 employees, including about 20,000 part time employees. The average hourly wage is $16.85. Roughly 93% of the company’s employees are represented by one of 12 different unions. Many of those unions have bumping rights that the company has described as a barrier to reducing costs. Bumping is when during a reduction in employees, if a more senior employee’s job is eliminated, rather than that employee losing his or her job, he or she “bumps” a less senior empployee, taking that employee’s job.
According to a statement released by the company, about 25 stores will close almost immediately.
The United Food and Commercial Workers (UFCW) International Union, which represents many A&P workers, have called on the grocery chain to “stay in business during this bankruptcy process and honor its responsibilities to its employees, our members and their families.”
In a released statement by the union it said:
“Our message to any potential buyers of A&P is that our hard-working members are not just employees, they are the heart and soul of these stores. For the sake of the men and women of A&P, now is the time for A&P and any potential buyer to focus on doing what is right for our hard-working members and their families.”
Chapter 11 Bankruptcy
In a Chapter 11 bankruptcy, a company is able to reorganize its operations, income, and expenses while regaining profits. The business is still able to remain in operation during this process, which can greatly help the business in regaining profits. To emerge from bankruptcy, the business must gain the approval of the court and its creditors.
According to court filings, the prospective A&P buyers — Acme Markets, Stop & Shop Supermarket and Key Food Stores — do not want A&P’s pension obligations. This could potentially lead to a legal battle between the chain’s unions and the debtor.
“The best and only viable path to maximize the value of their business and preserve thousands of jobs is a strategic Chapter 11 filing to facilitate sales free and clear of liabilities,” said McGarry.
A&P has lined up $100 million debtor-in-possession financing, Debtor-in-possession financing is a loan that allows a bankrupt entity to access capital while operating under court supervision. The financing was approved by the bankruptcy court during the filing.
Just like many retailers that have a long legacy, A&P’s biggest asset may be its locations and the real estate that exist because of those locations. The company has described its real estate as “extremely valuable.” Restructuring adviser Hilco has been hired to evaluate and monetize its commercial real estate.
This is not the first time the company has filed for bankruptcy. In 2010 the company filed for Chapter 11. Emerging in 2012, it seems the company has failed to find itself on a sustainable path. The most recent filing states the company erred by keeping 50 to 60 under-performing stores open “in favor of preserving the jobs in those stores” and also did not successfully reduce its pension obligations and other costs from the first bankruptcy.
“These obligations have been a drain on the company” since then, said McGarry.
The company also has other sources of secured financing, including investors represented by U.S. Bank for $677.1 million and Wells Fargo Bank for $561 million.
While the company earned $46 million before accounting for taxes, interest, depreciation and other costs during its 2014 fiscal year, that translated into a book loss of $305 million.
Despite the fact that A&P had $5.5 billion in revenue, the grocery chain has been hemorrhaging cash, said company attorney, Schrock. Cash losses were about $14 million a month this year, he went on to say.
Additionally, according to Michael Nowlan, a senior managing director of FTI Consulting, a financial adviser for A&P and its affiliates, A&P recently suffered a $25 million cash drain because some so-called direct store delivery vendors who supply milk, eggs, cheese and other critical products demanded changes in payment and credit terms or threatened to stop shipments.
In a released statement from A&P CEO Paul Hertz, he described the pending bankruptcy and store closures as an attempt to “preserve as many jobs as possible” and “maximize value for all stakeholders.”
“While the decision to close some stores is always difficult, these actions will enable the company to refocus its efforts to ensure the vast majority of A&P stores continue operating under new owners as a result of the court-supervised process,” Hertz went on to say. “We greatly appreciate the continued support of our customers, suppliers and employees, who have maintained an unwavering commitment to our business and our customers.”
Chapter 11 Bankruptcy Protection
Under a Chapter 11 bankruptcy protection plan, a debtor is able to reorganize and restructure its financial affairs. The plan is a contract between the debtor and the debtor’s creditors that outlines how a debtor will operate and pay for future obligations.
Often this plan means a debtor will need to downsize operations in order to reduce expenses and free up assets. Often times, as is currently being seen with Chevron and similar oil companies, a move to cut spending and lower costs is a way to recoup some money in order to avoid bankruptcy.
Liquidation and Chapter 11
In some cases, where restructuring will not yield enough income to pay debts, a “liquidation plan” is necessary. Under liquidation, a debtor’s operations are shut down and its remaining property is sold to recoup money to pay off creditors.
Typically, a debtor receives four months to propose a reorganization plan following its initial filing of Chapter 11. This “exclusivity period” can be extended to up to 18 months following the petition date if the debtor is able to show good cause. While it can be extended, it can also be shortened, depending on the circumstances of the filing.
After the “exclusivity period” ends, the creditors’ committee and/ or other parties are able to propose competing for reorganization plans. This is a fairly rare practice though. In these cases, it’s typical that a creditor committee or other party will move to either dismiss the bankruptcy filing or convert the case to Chapter 7. During Chapter 7 a bankruptcy trustee cancels many (or all) of the company’s debts. This can also mean the trustee will sell, or “liquidate” some of the property to pay back creditors.
Though rare, occasionally, a Chapter 11 reorganization plan will allow for every creditor to be paid back immediately, and in full. If this is not the case, as per usual, creditors are allowed to vote on whether or not they will accept the proposed Chapter 11 plan.
During this vote, at least one class of “impaired” claims must approve the Chapter plan in order for the plan to be approved by the bankruptcy court. Upon the plan being confirmed, an “impaired” claim is an obligation that will not be paid in full or when originally due.
Working With an Attorney
Facing bankruptcy, regardless of if it’s a personal or business bankruptcy, is a scary thing. There might be ways to avoid it and still keep your credit intact. Working with a bankruptcy lawyer will ensure you are made aware of all the options available to you. Because bankruptcy law can be confusing, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have should you decide to file. There can be a lot of questions during this extremely stressful time. Let the lawyers at RHM LAW LLP walk you through the process so you can achieve the best outcome possible.