Washington Prime Ch. 11 Marks New Uncertainties for Retail

Washington Prime Group Inc. filed for Chapter 11 in Texas bankruptcy court, marking another phase of the retail fallout from the ongoing COVID-19 pandemic — the effect of retail’s rent struggles and store closures on malls. 

The bankruptcy filing Sunday night of the mall real estate investment trust, which has some 102 shopping centers and about 52 million square feet of space in the U.S., follows those of mall operators Pennsylvania REIT and CBL in recent months. 

In court filings on Monday, Washington Prime acknowledged financial difficulties that predated the pandemic, including the store closures of important tenants including Sears and Bon-Ton Stores after their own previous bankruptcy filings. But it also highlights a narrative about the domino effect of the widely reported retail defaults during the COVID-19 crisis in the U.S., as the deadly airborne contagion led first to temporary store closures and then to a longer-term shift in consumers’ lifestyles and shopping habits. 

“WPG was forced to provide certain tenants with rent relief through a combination of rent deferrals and abatements to avoid tenant bankruptcies and lease abandonments during most of 2020, when in-person commerce was largely nonexistent,” Washington Prime’s chief financial officer Mark E. Yale wrote in a declaration filed in the case. 

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“Although these measures aided in maintaining occupancy rates, they had a material adverse effect on WPG’s revenues, operations, and cash flows for the year ending Dec. 31, 2020, and continue to impact the company in 2021,” he said.   

Washington Prime’s bankruptcy plan incorporates a proposed restructuring support agreement between the company and its lender groups, which outlines negotiated terms to equitize certain debt, contemplates a $1.2 billion exit term loan facility and indicates the company would seek the court’s approval for $100 million in debtor-in-possession financing. 

But the deal also makes room to address one of the central uncertainties of the case, and for that matter, of any retail entity in 2021: what the value of its underlying properties will turn out to be. 

With that in mind, the proposal incorporates a so-called “toggle feature,” which would allow the company to pursue potential investors and buyers for the business. The company and its bankers have marketed Washington Prime’s business to potential strategic and financial partners for the past month, and have sought to continue that process for longer during the bankruptcy. 

Any successful acquisition bid would, of course, have to offer better recoveries than what the current restructuring support agreement provides for. 

“They’re recognizing that it’s probably hard to value what this company is worth,” said Andrew Kamensky, partner at Kelley Kronenberg. Kamensky isn’t involved in the case and spoke generally. 

“You’re starting to have a resurgence of business, people are getting vaccinated, stores are reopening, and you can see the real estate market has gone berserk in so many parts of the country.

“The creditors and debtors were having difficulty, perhaps, identifying, what is the true value of the business,” he added. “The toggle feature to test the marketplace to really see if what’s been proposed right now is the best outcome for all parties concerned.” 

The bankruptcy process, while often perceived as an ominous or bleak development for companies, sometimes rightfully so, can nonetheless offer certain structural advantages for companies. For one, it grants the benefit of the automatic stay of cases against the company, which halts all immediate demands, lawsuits and collection actions against it. 

“It provides, as with any bankruptcy, breathing space to deal with the problems comprehensively as opposed to a one-off fashion,” said Brian Free, attorney at Hillis Clark Martin & Peterson P.S., who has no role in the Washington Prime case and commented broadly. 

“It will be interesting to see how they use the Chapter 11 bankruptcy process to provide that breathing space,” he added. “It’s not going to change overall economic trends, so if they can use it as a way to restructure and make the underlying property viable, then it could be successful, but they do need to have that underlying strategy.”  

The key questions at the end of these proceedings would ultimately be what kind of occupancy are these malls going to be left with, whether the rents are likely to increase or drop, and if more retailers end up filing for Chapter 11 after the current lull in filings, attorneys said. 

“Those are the main unknowns, and those drive value,” said Kirk L. Brett, who chairs the bankruptcy, creditors’ rights and business reorganizations practice group, Duval & Stachenfeld LLP. Brett isn’t involved in the Washington Prime case. 

“The value of the mall is dictated by the extent of the tenancy and what the rents are that they’re paying,” he said. “If you’re trying to see what the restructurings will look like going forward, that depends on the value, and the value is dependent upon the tenants.”

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