Saks Global Enterprises Bankruptcy: What Creditors Need To Know Now

According to reports, Saks Global Enterprises, a leader in luxury retail, is preparing to file for Chapter 11 bankruptcy protection imminently. Saks houses such iconic brands as Saks Fifth Avenue, Bergdorf Goodman, and Neiman Marcus. Despite a recent recapitalization, the filing by this iconic company should not be a surprise to those following the industry closely. Retail has continued to face increased costs due to tariffs, inflationary pressures, ballooning consumer debt, and the continued rise of e-commerce competitors (including the upstart Quince). Total debt throughout the Saks enterprise is said to exceed $6 billion. The filing, when it comes, will follow a year-end missed interest payment in respect of certain notes, a sure signal of restructuring activity to come.

For lenders, landlords, suppliers, and other creditors, early preparation for a bankruptcy filing, and taking decisive steps during any bankruptcy case, will be critical to protecting interests and maximizing recoveries.

In bankruptcy, the order of payment to creditors is dictated by the Bankruptcy Code.

• Senior secured lenders are first in line for payment with respect to their collateral. Saks has a complicated capital structure that includes a secured asset-based lending facility and multiple series of senior secured notes with varying levels of priority. Those lenders will be entitled to the value of their collateral before most other creditor classes are entitled to receive value.

• Unsecured creditors rank behind secured lenders. These include trade vendors, landlords (with respect to their pre-petition claims), and service providers. To protect their position, unsecured creditors should pay close attention to the bankruptcy docket, including monitoring for critical deadlines for filing proofs of claim. Large creditors may get an opportunity to participate on an official unsecured creditors' committee which provides a better opportunity to participate in the process. Official committees are entitled to retain their own professionals, the costs of which are paid by the estate.

• Landlords whose leases may be rejected remain unsecured for lost future rents and should assess their exposure. They must calculate both pre-petition arrears and potential post-rejection damages (subject to certain statutory caps), assembling comprehensive documentation for their claims.

• Those trade vendors and landlords that continue to provide value following the filing will be treated as administrative claimants and be entitled to payment in full for their post-petition claims (so long as the debtor confirms a plan of reorganization).

A core feature of Chapter 11 is the debtor's ability to assume or reject executory contracts and unexpired leases. Very generally, these are contracts and leases for which material obligations remain on both sides. Suppliers and service providers should evaluate if their contracts are likely critical for reorganization, and which might be at risk of rejection. If a contract is assumed, the debtor must "cure" all monetary defaults, including past due payments. If rejected, they are left with a general unsecured claim that may be of little value. Landlords must anticipate that Saks will seek to reject underperforming locations to stem losses. When a lease is rejected, landlords should pursue damages claims as may be permitted under Section 502(b)(6) of the Bankruptcy Code. Both landlords and suppliers should maintain open lines of communication with Saks' and its restructuring professionals to clarify the status of their contracts or leases—whether they are to be assumed, rejected, or renegotiated—and respond quickly to the court-mandated notices.

The Bankruptcy Code provides two unique avenues for enhancing supplier recoveries.

• Suppliers essential to Saks' operations may be paid some or all of their pre-petition claims in full to avoid supply chain interruptions. Typically, a debtor will file a "critical vendor" motion early in the case. This is generally reserved for suppliers of strategically important goods or services (and that are willing to continue post-petition trading). Early communication with Saks, including through well-connected counsel, can be an important factor in achieving this preferred status.

• If a supplier delivered goods to Saks within 20 days prior to the bankruptcy filing, that claim for goods delivered is given administrative priority status under Section 503(b)(9) of the Bankruptcy Code. Note that this does not apply to services. Careful documentation of delivery dates is essential, as is timely filing—delays or mistakes can lead to forfeiture of this priority in payment.

Saks will certainly seek court approval for post-petition (DIP) financing, giving those lenders super-priority status. Press reports indicate that such financing may exceed $1 billion. Likewise, Saks may move rapidly to sell select assets. Aggressive DIP financing terms can greatly impact recoveries. Indeed, broad liens and roll-up features (i.e., rolling up prepetition loans to post-petition status) can dilute claims, especially for unsecured creditors. Stay alert for DIP financing motions. A careful review will certainly uncover much important information, including the path and timeline of the case. The motion will also include budgets, which may provide some color on the proposed claims to be paid during the course of the case.

Suppliers and other creditors should be mindful that, in time, Saks will seek the avoidance of preferential transfers made by the debtor during the 90-days prior to the bankruptcy filing. Very generally, preferences are those payments that are made by the debtor during the 90-days prior to the filing, on account of antecedent debt, while insolvent. There are a number of affirmative defenses, including payments made in the ordinary course of business, to be considered. An early analysis of payments received during this period, and the conduct of the parties with respect thereto, can prevent surprises in the future.

The potential filing of Saks Global Enterprises will represent a major shift in the luxury retail landscape and poses substantial risks—but also opportunities—for various creditor groups. By paying careful attention to the proceedings, landlords, suppliers, and other financial stakeholders can take concrete steps to protect their interests and position themselves for the best possible outcome.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.