The past 12 months have been miserable for retailers, with many well-known names filing for bankruptcy in the wake of the coronavirus pandemic. One such retailer was privately held department store Belk. But while news of a retail bankruptcy is generally enough to send mall real estate investment trust (REIT) investors into a panic, this time around, there was no need.
Why Belk's bankruptcy was unique
Corporate bankruptcies come in two forms: Chapter 7 and Chapter 11. The former tends to be really bad news, because it's a complete liquidation of assets. Chapter 11, however, is merely a restructuring of debt and allows filers to continue operating, albeit with less debt to grapple with.
Earlier this year, Belk made it known that it would be seeking bankruptcy protection in light of its heavy debt load -- a load made more difficult to manage when store revenue took a hit in the course of the pandemic. Belk entered Chapter 11 with $1.9 billion in funded debt, and sales dropped 32% year over year between March and December 2020.
But whereas many Chapter 11 bankruptcies are long, drawn-out processes, Belk's was extremely unique in that it emerged from its filing in only one day.
Prior to its filing, Belk had spent time negotiating with its lenders so the bankruptcy process was really just a formalized version of those discussions. All told, Belk managed to exit bankruptcy with $225 million in new capital, extended terms on its loans, and $450 million less in debt.
But just as importantly, Belk's bankruptcy was arranged as such so that stores wouldn't need to be closed in its wake. Not only are there no expected closures following Belk's bankruptcy, but the company plans to retain the 17,000 employees it has on its payroll.
Malls aren't getting hurt -- this time
Malls have lost a number of important tenants in the past year, including department stores. These are especially hard to part with since they serve as anchors, taking up space on multiple floors and serving as a source of income stability. The fact that Belk has no store closure plans is positive news for malls, given the way many are already facing a pretty substantial vacancy crisis.
With a pile of new capital and a fair amount of unloaded debt, Belk is now in a strong position to stage its post-pandemic recovery. In the coming months, as more Americans get vaccinated, foot traffic is likely to pick up in department stores and malls alike. So if Belk can hang on until then, it has a chance to make up for the impact of the past year.
That said, closing a few underperforming stores could be a strategic move for Belk, and one the retailer may need to consider. And Belk will need to ramp up its e-commerce efforts -- an area it's previously lacked in.
Other retailers, however, may not be as lucky, and store closures could be in their future. The fact that malls averted disaster this time around is therefore a very fortunate thing.