Unfortunately, none of the alternatives is particularly attractive for the Co-Op. On November 18, a community meeting will be held and the board will present its recommendation on a course of action, and the membership will vote Yay or Nay on the board's suggestion.
From our perspective, it's about time. The status quo and on-going cash burn situation have turned the Co-Op into a sinking ship.
While some folks might have hoped for the luxury of time to let the 55th Street store continue to generate profits that would be siphoned off to pay for the on-going lease obligations at the 47th Street location and various vendors, the Co-Op has been digging itself into a deeper financial hole as each month passes because what it owes still far outstrips the cash it is able to generate.
Now the board is finally entertaining the drastic solutions that this type of situation calls for.
The board must choose from four options, two of which will allow the Co-Op's 55th Street store to remain in operation, and two that will shut that store down.
Before we assess the four approaches, we have one large caveat that must be voiced. If the board endorses an alternative that allows the 55th Street store to continue operations, the members are being asked to take a leap of faith that this board will govern responsibly, and avoid making the types of bone-headed decisions made by multiple previous boards.
That long history of bad decisions by previous Co-Op boards is what landed the Co-Op in its current situation in the first place. In our view, it is incumbent on this board to demonstrate that it can do differently, before asking for a vote.
Option A - "The Good Samaritan" - Debt Consolidation
This is similar to the low production-value, late-night television ads that offer to help those who are drowning in late payments to the utility companies, credit card companies, and other consumer lenders. It involves consolidating all the Co-Op's various debts to landlords and vendors, and then working out a plan to chip away at that mountain of debt over a long period of time.
This approach would require an entity, like a bank, to step up and take over all the Co-Op's debts and then receive payment little by little. It would also allow the Co-Op to avoid going to bankruptcy court and to continue operating the 55th Street store.
We're skeptical that any bank would actually be stupid enough to take on the consolidated debt of the Co-Op, unless management and the current board truly show that they, unlike previous boards, are ready to make difficult decisions and smart choices going forward.
Option B - "Sorry Charlie" - Creditors Left Holding the Bag
The Co-Op would negotiate with creditors to buy out the Co-Op's current leases, and shut down operations at the 55th Street store. This would not involve the bankruptcy courts.
Option C - "The Lindsay Lohan" - Going into Rehab
Like LiLo going to rehab, the Co-Op would file for Chapter 11, gain the bankruptcy court's protection, get time to reorganize its financial affairs, get its hydra-heads as straight as possible, and eventually emerge from bankruptcy in a (hopefully) healthier state.
This alternative isn't wholly unlike the 12-step program and having to apologize to those you have hurt in the past. It involves working out a new plan for paying off creditors, negotiating with every vested party (e.g., vendors, landlords, creditors, unions), and getting their agreement to the new plan.
As a result, this approach tends to involve a lot of lawyers and take a fair amount of time. But, it would allow the 55th Street store to continue operations. When the Co-Op leaves bankruptcy, the pre-petition shareholders (i.e., current members) will likely have no claim on the Co-Op, and it will instead be owned by the post-petition creditors.
In other words, whatever current members paid to buy their shares will almost certainly never come back to them.
Option D - Just Plain Vulture Food
The Co-Op would file for bankruptcy, shut down the 55th Street store, and liquidate all remaining assets. This is usually the best choice when a business is worth more dead than alive.
We believe Options B and D are unlikely to really happen. As with mortgage lenders when they are faced with foreclosing on a home, creditors are generally very reluctant to take ownership of the actual assets, and then put the time and resources into selling them at fire-sale prices, or worse, actually operating them. Banks want to be in the lending business, not the residential real estate business.
Banks only foreclose when it becomes clear that they'll never get their money back. We suspect that Certified and the University don't want to be on the hook for a bunch of leases with empty store space. It would be in their best interest to work out a new payment plan, which may involve smaller payments stretched over a longer period of time.
One rule of thumb: when shareholders equity is negative (as it is in the Co-Op's case), bankruptcy and reorganization is often favored. Another consideration is whether the Co-Op's assets would be put to better use elsewhere.
If so, then liquidation is the best bet for paying off creditors. In this case, it's not clear that many other parties would have use for the Co-Op's assets, which include refrigerator cases, inventory, shelving, and equity in other co-ops.
After weighing these factors, we're laying odds on the board recommending rehab. Britney, Lindsay, move over: here comes the Co-Op.