No matter which option is ultimately selected, the Co-Op and its democratic community principles will no longer exist, whether the 55th Street store stays in operation or not.
Further, any funds raised in a "capital drive" not only will probably never be refunded, but may very well end up helping to keep alive a store that winds up owned by someone other than the remaining cooperative members.
And, if the die-hard faction's proposal to go into bankruptcy and reject the University's bail-out is chosen, the high risk of eventual liquidation of the Co-Op's assets means that the chances are higher that the neighborhood will go longer without any grocery store at all. No one brought up this potential consequence of the bankruptcy route.
But first, let's review the afternoon's events.
It was cause for some concern that the audience was clearly composed mostly of die-hard Co-Op supporters who did not understand the magnitude of the institution's financial distress, the concrete implications of bankruptcy proceedings, or the complicity of the retail cooperative Certified in the Co-Op's troubles.
The first option presented, also known as "Sorry Charlie" in our earlier post, involves the generous debt workout plan that the University has proposed. This approach would allow the University to buy out the remainder of the 55th Street store lease (through 2013) and forgive the 14 months of back rent that the Co-Op still owes. The 55th Street store would close, and a new grocery store would open within 14 days of the Co-Op's exit. The Co-Op would take the proceeds from the buyout and pay off the 47th Street lease with Certified, and pay off its vendors.
While the University has purportedly had discussions with several grocers, it has clearly stated that whichever grocer ends up moving into 55th Street must make significant improvements to the store space. With this option, the Co-Op's last remaining store would likely be shut by the end of January, and a new grocer would open up in that freshened space within two weeks.
The second option, also known as "Rehab," means the Co-Op would file for Chapter 11 bankruptcy, keep the 55th Street store in operation, and attempt to clean its financial house. However, this option is fraught with 6 very big "ifs."
The 6 Very Big IFs:
Rehab will only work out 1) if the Co-Op is able to get an approximately $2 million loan; 2) if Certified will agree to a $1 million buyout of the 47th Street lease; 3) if the Co-Op can raise "substantial" pledges from the membership for the capital campaign; 4) if General Manager Brandfon stays on and continues to improve operations; 5) if shoppers start spending more food dollars at the store; and 6) if it can pay off all its creditors 100%.
Even if all of the above conditions are met, make no mistake about it: this alternative would only save the existing grocery store at 55th Street -- but not the current cooperative management or ownership structure -- and the store would wind up in the possession of whichever lender is foolhardy enough to loan the Co-Op more money. It does not allow the membership to retain control of the Co-Op during bankruptcy proceedings.
In this Chapter 11 debtor-in-possession arrangement, the new (post-bankruptcy petition) creditor will take precedence over pre-petition creditors and shareholders (the membership), and will be in the position to oversee operations of the 55th Street store.
As one Hyde Park resident, Mark Johnson, pointed out in the meeting, the creditors will have a lot of influence on the bankruptcy judge, not the Co-Op members. In this bankruptcy situation, the Co-Op will be answering to its newest creditor, not to its membership. So much for the democratic control that the Co-Op likes to stand for.
If the Co-Op pursues rehab and is not able to secure the considerable financing necessary, then the default would be bankruptcy and liquidation. In this case, the 55th Street store would be shut down, the court would appoint an independent party to liquidate all remaining assets and pay creditors in order of seniority.
This default situation would also likely make it very difficult for the 55th Street landlord, the University, to line up a new grocer on short notice, leaving the neighborhood potentially without any grocery store for longer than 14 days.
Note: the Co-Op has thus far not been able to secure financing for rehab. It must be in place by 12/17/2007, which is when the University is likely to file for foreclosure notice on the 55th Street store.
So, the clock is ticking. The National Cooperative Bank is willing to entertain the possibility of loaning the Co-Op $2 million, which would allow the Co-Op to enter Chapter 11, and will be voting on it Monday 11/19. But before anyone gets too excited, the NCB's loan is itself contingent upon Certified Grocers agreeing to a $1 million buyout of the 47th Street lease. As President Poueymirou pointed out, Certified has not in the past and is not currently willing to negotiate on this point.
In the earlier Keystone Co-Op posts, we had originally thought the board would endorse the rehab option. After the University entered the scene with its extremely generous debt workout offer, we then believed the board was likely to move in that direction. As it turns out, the board is split on these two approaches.
With the University's debt workout plan, the biggest uncertainty is which grocer would move into the 55th Street store space. However, I'm fairly confident that any new grocer would be an improvement on how the 55th Street store has been run over the last five years.
With the rehab option, on the other hand, there is more uncertainty and risk concerning the ultimate outcome. Going down that path could result in 1) a quick liquidation, 2) a long, slow death if the capital campaign fails or if GM Brandfon leaves, or 3) ownership by creditors even after emerging from bankruptcy if the Co-Op fails to pay off its creditors 100%. In this last scenario, the members would be left out in the cold, and their shares would still be worthless.
Interestingly enough, many members who commented in the meeting seemed willing to view the University as the great villain in this drama, but no one was nearly as critical about Certified, which in my view has been the biggest obstacle keeping the Co-Op from regaining any financial footing.
The University has cut the Co-Op plenty of slack, to the tune of 14 months of missing rent payments, while Certified has been quick to cut off food shipments as soon as the 47th Street rent payment is late. As President Poueymirou related, the Co-Op tried to stop its rent payment to Certified only last month, but Certified immediately cut off a food shipment.
As a result, the only reason the Co-Op has been able to continue to stock its shelves and stay in business is because it's stiffing the University on rent in order to keep up with its lease with Certified. In this case, the membership should be thanking the University.
Big kudos go to President Poueymirou, Treasurer Lowenthal, and Alderman Toni Preckwinkle for championing the debt workout plan -- the most realistic option that will bring a new grocer to the neighborhood in an orderly and efficient manner. While they are in a difficult position of having to advocate for the end of a Hyde Park institution, this is the most financially responsible choice for members.
On the other hand, Secretary Withrow and Director Stanek fueled hope and promoted the rehab option, without explicitly outlining the risks associated with that approach. In the vast majority of bankruptcy cases, the pre-petition shareholders -- such as shareholders -- are left with a big fat zero by the end of the reorg. Chances are very slim that members will get any value for their stock, or enjoy the right to participate in the management of the business.
That's because control over the Co-Op during the reorg will reside with the creditors, not the members. For all practical purposes, it will cease to be a cooperative. Rehab promoters ask members to invest more money in the capital campaign, while chances of ever realizing a return are extremely low. If you are inclined to make a pledge, I'd suggest you think of it as a donation.
Needless to say, this vote is very important and all Co-Op members should make sure their voice is heard on the options. Ballots will be mailed starting Wednesday 11/21. Having said that, the membership vote will only be taken into advisory by the board. In the end, the board is authorized to make the decision, and it may have to do so very quickly in those few days before 12/17.