After filing for and being granted creditor protection under the Companies' Creditors Arrangement Act (CCAA) on March 7, the Hudson's Bay Company (HBC) was set to return to court on March 17 with a liquidation plan. However, due to the scale of its insolvency and competing motions filed by affected parties, the court delayed its decision twice this week, before finally granting approval for the liquidation to commence starting Monday, March 24.
In the late-evening on March 14, Hudson's Bay published a press release announcing that it would undergo a full liquidation unless a last-minute solution materialized. Across the country, HBC operates a total of 96 stores under the Hudson's Bay, Saks Fifth Avenue, and Saks OFF 5TH brands. A solution that would allow HBC to live on has still not fully materialized, but HBC is hoping to preserve six stores, according to court documents filed today.
Those six stores, HBC's ownership interest in them, and their landlords are as follows:
- 176 Yonge Street - Toronto, ON / Traditional Lease / Ontrea Inc. (Ontario's Teachers' Pension Plan)
- Yorkdale Shopping Centre - Toronto, ON / Co-leasehold with RioCan / Yorkdale Shopping Centre Holdings Inc. (Oxford Properties / Ontario Municipal Employees Retirement System)
- Hillcrest Mall - Richmond Hill, ON / Traditional Lease / Montez Hillcrest Inc. and Hillcrest Holdings Inc. (Montez Corporation & Oxford Properties / OMERS)
- Downtown Montreal - Montreal, QB / Co-freehold with RioCan / RioCan-HBC Limited Partnership
- Carrefour Laval - Laval, QC / Co-leasehold with RioCan / Le Carrefour Laval REC Inc. (Cadillac Fairview)
- Fairview Pointe Claire - Pointe Claire, QC / Traditional Lease / Fairview Pointe-Claire Leaseholds Inc. (Cadillac Fairview)
For the time being, HBC has reached a restructuring support agreement with three of its existing lenders — Bank of America, Pathlight Capital, and Restore Capital — to commence with its liquidation plan. The liquidation that begins on March 24 will exclude the aforementioned stores, but they may be added to the liquidation plan as early April 5 if HBC cannot secure a "firm commitment" for a restructuring transaction involving those six stores.
Under this restructuring support agreement, the three lenders will be the third-priority charge holder to receive distributions from the sales proceeds of HBC's inventory and assets. The first-priority charge is for the administrators of the CCAA proceedings (legal counsel and the Monitor), to the maximum of $2,800,000; while the second is for the HBC employees that are critical to the ongoing proceedings, to the maximum of $3,000,000. Under the agreement, HBC is also obligated to provide the lenders with budget reports and comply with agreed upon variance thresholds.
Lease Monetization
As HBC has previously suggested, it will also be attempting to monetize its leases, many of which the company believes are valuable because the rents are below current market rates.
JLL Canada was originally proposed as the broker to market HBC's leases, but the process is now moving forward with Montreal-based retail strategies firm Oberfeld Snowcap instead.
This decision was made because HBC became aware of professional conflicts between JLL Canada and some of HBC's landlords, according to HBC.
According to the consulting agreement, Oberfeld Snowcap will receive $80,000 per month for a term that ends on September 30. For each lease that Oberfeld successfully sells, transfers, or assigns, it will receive 10% of the net proceeds up to a maximum aggregate of $175,000.
The leases for all 96 stores — including the six stores that are being temporarily withheld from liquidation — will be marketed by Oberfeld, plus the leases HBC holds for its four distribution centres.
Rent Dispute With RioCan
The Hudson's Bay store at the Yorkdale Shopping Centre in Ontario. / JohnInNorthYork, Shutterstock
A resolution was also reached over a disagreement between HBC and RioCan REIT (TSX: REI.UN) over unpaid rent.
In February 2015, the two companies created a joint venture that saw each company contribute a set of their own properties. As previously outlined by STOREYS, the joint venture included five freehold properties, five leasehold properties, and 50% ownership stakes in two Ontario shopping centres owned by RioCan. That joint venture became HBC's primary subsidiary for its real estate holdings and the judge presiding over the case has described it as "fully intertwined" with HBC. Under the structure of the JV, the JV entity — RioCan-HBC Limited Partnership — holds the ownership interest in the properties then leases the spaces to HBC.
However, as part of the creditor protection that HBC secured on March 7, HBC was allowed to suspend rent payments to the joint venture entity. Ahead of the March 17 hearing, RioCan then filed a motion challenging this, calling it "unprecedented" in CCAA proceedings and saying that HBC did not consult RioCan about this, as it was obligated to under their partnership agreement.
That dispute was one of the factors that resulted in this week's delays, but the two sides have now found a compromise. According to HBC, it will now pay approximately 70% of its rent obligations — $7,000,000 of approximately $10,000,000 per month — to the JV entity as it relates to 10 of the JV's 12 properties. Excluded are the leases pertaining to the Georgian Mall and Oakville Place, which the JV owns a 50% interest in. RioCan alone then owns the remaining 50% in both properties. The unpaid amounts will then be secured as the fifth-priority charge, following the aforementioned three charges and the fourth-priority charge for the indemnification of HBC's directors.
What Happens Next
According to the court-appointed Monitor, Alvarez & Marsal, some of the above was made possible in part because of an uptick in foot traffic and sales at Hudson's Bay stores since its insolvency became public.
Based on historical sales trends, it was originally estimated that HBC would have a budget of $13,569,000 to work with. However, from March 8 — the day after it was granted creditor protection — to March 14, it secured $20,966,000 — over $7.4 million more than what was expected.
On March 19, HBC was then able to pay rent owed to its various landlords for the period of March 16 to March 31, and the improved cash flow is forecasted to continue to the point that the Monitor believes HBC no longer needs to secure further financing to fund the restructuring and liquidation.
Creditor protection for HBC has now been extended to May 15 and the liquidation is scheduled to be completed by June 30.
