The landlords of Target's 130 leased retail stores in Canada are likely to be among the biggest losers in a bankruptcy process started by Target Canada on Thursday.
Target Canada can expect to hear from many stakeholders who want to be paid, including landlords, product suppliers, and employees. But the company is planning to provide severance to workers, and it will have to tread lightly with suppliers expected to continue selling to Target's 1,801 U.S. stores.
Typically, such unsecured creditors in a bankruptcy might expect to see 15 cents on the dollar in repaid debts, but Target Canada suppliers can probably expect more generous treatment than that, said Edwin Caldie, a partner in commercial bankruptcy law at Stinson Leonard Street in Minneapolis. "I suspect Target has to be careful in dealing with those people, because they're still dealing with them in the U.S., and they don't want to hurt relationships they need to maintain," he said.
Recourse is less clear for the landlords that own 130 of Target's 133 Canadian stores, many of which are big anchor-tenant spaces in malls.
On Thursday, just after announcing its intention to close all 133 stores, Target Canada filed for protection from creditors under one of Canada's main bankruptcy laws, the Companies' Creditors Arrangement Act (CCAA).
After a short hearing Thursday, a judge with the Ontario Superior Court of Justice in Toronto granted Target Canada's initial request to open a case. The order has the same effect as an automatic stay granted to bankruptcy filers in the U.S., meaning that all stakeholders must to go through the court to collect on their debts while the case is open. Such a case is likely to last at least a year.
"It gives them some protection," said Robert Eisenbach III, a bankruptcy lawyer with Cooley in San Francisco. "That initial order keeps the creditors at bay."
The petition and related exhibits run to hundreds of pages. The filings reveal that as of November, Target Canada had $689 million in current liabilities, including over $100 million due to its real estate holding company. Both figures were listed in Canadian dollars.
The filings say the company paid a net $1.6 billion in 2011 to acquire leases scattered across every Canadian province, including seven for stores that were still in the process of being opened. The leases last between five and 10 years, and the company makes direct monthly rent payments to its landlords.
The filing notes that many of the leases directly prohibit "going out of business" sales.
Although Target Corp. appears shielded from the debts because of the companies were structured, Target Corp. has agreed to provide a $175 million revolving line of credit without fees to Target Canada to use during the wind-down proceedings.
Jeff Gollob, a longtime corporate restructuring lawyer in Toronto, said corporate reorganization filings under Canada's CCAA have become fairly common, even in cases like Target Canada's, where the company doesn't expect to emerge from the process as an operating business.
"You will not see anywhere in the CCAA that it is a liquidation statute, and in fact it is not intended as such," Gollob said. "But given the fact that it is so flexible, and permits companies with court permission to fashion a result to suit circumstances, it has become the go-to statute for companies looking to reorganize."