Tops Bankruptcy

On February 21, 2018, Tops Holding II and its subsidiaries filed for bankruptcy. Tops is a grocery chain in the northeast with 169 owned stores and five franchise stores in upstate New York, northern Pennsylvania, and Vermont. 2017 audited financials showed a net loss of $80M on revenue of $2.5B ($14.3M per store, or $275k per store per week). Tops stores average about 45k sqare feet. Both size and sales are right on the per store industry average.

The debtors are calling this a “comprehensive financial restructuring,” which likely means, in addition to the reduction of debt, the operations need some changes to remain competitive. Mentioning union negotiations in the first day filings is a clue.

Unions Targeted

Tops is mostly unionized, with 12.3k out of 14k employees counting themselves as union members. Work rules built into the CBA are often the target of CBA modifications.  While wage concessions help, often the difficulty and expense of union labor are the specific rules that dictate how employees can work, and how flexible employers can be with the union workforce. Even in more industrial and specialized environments, employees are willing and capable of other work and can be very effective.  CBAs do not always allow for it. Non-wage concessions on work rules can be both the easiest for the union to sell to its members and the most impactful for the operations of the company.

Timeline

The CRO’s first day declaration says, “…the Debtors intend to remain in chapter 11 for approximately six (6) months.” In our view six months is simply not realistic. Modifying CBAs with multiple unions is cause for concern. While Tops could have completed some legwork prior to filing, renegotiating agreements and gaining resolution on the pension issues is rarely fast. Employing the 1113 process to modify or reject a collective bargaining agreement takes time within a bankruptcy. There first need to be a number of good faith meetings between the debtor and the union, then a motion, then a hearing, and then a decision. Motion to decision is expedited at 51 days, but the negotiation process is typically several months worth of meetings and diligence.

Store Leases

Bankruptcy provides a necessary forum for productive negotiations with suppliers, landlords and labor unions. Any of the three constituents can have substantial misunderstandings of the situation. Landlords are often reticent to negotiate lower terms prior to bankruptcy because, especially if there are a large number of landlords, a concession from one is not likely to make the difference needed. The company enters bankruptcy anyway with cooperating landlords in worse negotiating position than they would have been without the concession. On the other hand, if there are concessions from enough landlords to make a difference, each of the dissenting landlords are better off than they would have been (let’s ignore the complication of future lease and business considerations for now).

In addition to negotiations on future leases, bankruptcy lets a debtor reject leases and close stores that are unprofitable. The debtors referred to the process in the first day filings of the store analysis that was taking place. In addition to rejecting the leases of stores that have already been abandoned by the debtors, the motion to Reject Certain Unexpired Leases (Docket 20) was setting the stage for more store closings. How deep Tops will go has yet to be determined.

Slim Margin for Error

It’s pretty difficult to be an average store in terms of size and sales in an industry that averages 1% margins.  Add in a few bad leases, generally high labor costs, and debt from two buyouts, and the cushion is gone for operational missteps to occur.

The First Day Motions Are Advantageous to Trade

The largest trade creditor, C&S Wholesale Grocers, supplies 66% of products and comprises $57M of the estimated $132M of prepetition accounts payable. It seems C&S had Tops on a short leash prior to the filing. C&S provided some prepetition relief for the debtor and negotiated a better position for itself.

The debtors stipulated that all of the $57M is either PACA/PASA or 503(b)(9) claims, which have special administrative priority in a chapter 11 filing. Also agreed to is an immediate payment of PACA/PASA claims and partial payment of 503(b)(9) claims in the amounts of $13M and $25M, respectively. That leaves a still generous $19M of essentially free financing that C&S is providing to the debtors, to be paid at the conclusion of the case along with other administrative expenses.

Shippers and lienholders account for another $3.3M. Those prepetiton amounts can generally be paid (after an approved motion and any procedures that are put in place) under the theory that shippers have a possessory lien on the product and won’t release the more valuable product until those prepetition amounts have been paid.

The Critical Vendor Motion (Docket 7) asks for another $36M in funds to pay prepetition unsecured creditors. $25M of the critical vendor pot is claimed by Tops to qualify for 503(b)(9) status. That percentage is an indication that Tops was not stretching its trade much prior to the filing.

Remaining Claims

So with those three motions we have $96M of $132M accounted for, leaving just $36M of prepetition unsecured accounts payable remaining. Depending on the number of leases rejected and the damages included and the potentially significant pension liability, there could be a substantial increase in the amount of unsecured claims. That waters down any payments ultimately made to the remaining unsecured claims. If you still have claims against Tops and wish to discuss the case, you can get in touch with us here.

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