Hudson Bay liquidation feels familiar to restructuring veteran

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Hudson’s Bay Co. ULC’s looming liquidation is eerily familiar to Hap Stephen, the veteran restructuring executive who has shepherded a number of high-profile companies through such difficulties, including the last gasps of another iconic Canadian retailer, T. Eaton Co. Ltd., better known simply as Eaton’s.

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“I’m not surprised,” he said less than a minute into a phone call to talk about what went wrong at HBC and what comes next. “This is a replay of what I went through at Eaton’s.”

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First came the court filing for protection from creditors under the Companies’ Creditors Arrangement Act, then the liquidation process, which is set to begin at Hudson’s Bay as soon as the court overseeing the creditor protection process gives the nod. That decision could have come as soon as Wednesday afternoon, but the judge has now given the respective parties until Friday to come to an agreement.

Stephen had an up-close view of Eaton’s collapse in the late 1990s, first as a restructuring expert and then as the company’s chief financial officer trying to navigate difficulties that followed the initial restructuring and public share offering. The final stumble into creditor protection came two years after the first, when a deal to be scooped up by a retail chain in the United States fell through.

Eaton’s creditors took a haircut in the liquidation, but a handful of stores survived thanks to retail rival Sears Co., which bought them and kept them open in large part to capture the benefits of accrued tax losses at Eaton’s, Stephen said.

“The landlords were part of the creditor group, and they were happy to have Sears continue to operate the stores for those particular (locations),” he said.

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Stephen said Hudson’s Bay finding a similar solution to rescue some of its 96 Bay, Saks Fifth Avenue and Saks Off Fifth stores is very unlikely.

The tax-loss play that drew Sears into taking over some of the failing Eaton’s stores could only work for HBC if it could find a willing buyer in the same sector, which is a much greater challenge some 25 years after the demise of Eaton’s since shopping continues to increasingly move online. Sears Canada itself filed for creditor protection in 2017 and all its Canadian stores were closed by 2018.

“I don’t see who could operate the stores,” Stephen said. “You couldn’t take them over and make them a movie theatre and use the tax loss.”

Nor does he predict much success in finding tenants to take over the leases and subleases in malls and shopping centres dotted across the country.

“We looked at what we could do with the properties, and there wasn’t a lot you could really do,” he said, recalling the Eaton’s store locations that weren’t taken over by Sears.

The real estate devoted to retail chains such as Eaton’s and the Bay, which sometimes occupy more than one level, is notoriously difficult to fill with another tenant, particularly if the landlord has restrictions on what type of business can be a tenant, Stephen said. Sometimes, these restrictions involve avoiding competition with other stores in the mall or shopping centre.

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“You … have to conform with whatever’s in your lease with the landlord,” he said. “How much … could you put in that’s not already there? It’s a really difficult problem.”

Court filings by HBC say some of its leases are below market value, suggesting they could have value if another tenant were to assume them. Jones Lang LaSalle Real Estate Services Inc. has been retained by HBC, pending court approval, to help the ailing retailer market its store and distribution centre leases.

However, Stephen said that while “anchor” tenants can get a substantial discount on lease rates because they are understood to bring shoppers into the mall and benefit other tenants, a landlord is unlikely to extend such favourable terms to a new tenant, especially one selected by an ailing department store. Instead, the landlord could simply wait the process out and start fresh with another company.

“Unless … the Bay pays the landlord, the landlord takes over the property,” he said. “This is (then) his property and there’s no lease on it, so he could do anything he wants.”

Some insolvencies play out well for creditors when there is real estate in the mix, but Stephen, who also oversaw the process at steelmakers Essar Steel Algoma Inc. and Stelco Inc., as well as Athlete’s World Ltd. and CanWest Global Communications Corp., said he doesn’t see that for HBC.

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For one thing, the company houses much of its real estate in a separately financed company in the United States that was created at the end of last year.

“They took out a lot of the real estate,” he said. “It wouldn’t help the Canadian operations.”

The newly formed U.S. company, Saks Global, which includes Saks, Bergdorf Goodman and Neiman Marcus stores in the U.S., is not part of the Canadian court-monitored proceedings now underway.

A December news release issued when HBC closed the acquisition of luxury department store Neiman Marcus said Saks Global would house “flagship properties with a US$7-billion gross asset value portfolio in luxury markets.”

It described the now standalone Canadian entity as owning or leasing a real estate portfolio valued at $2 billion, with some of that in a joint venture with RioCan Real Estate Investment Trust.

Court filings say there are 12 “freehold” and “head leasehold” properties in the HBC-RioCan joint venture. The stores on these properties in cities including Montreal and the Greater Toronto Area are leased or subleased from the joint venture or its subsidiaries.

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The filings say HBC has a number of landlords outside the joint venture, including the real estate subsidiaries of some of Canada’s largest pensions: the Ontario Teachers’ Pension Plan Board’s Cadillac Fairview Corp. Ltd.; OMERS-owned Oxford Properties Group; and the Caisse de dépôt et placement du Québec’s Ivanhoé Cambridge Inc.

Stephen said the court filings show that some of HBC’s Canadian properties carry debt, second mortgages in some cases, so he isn’t convinced the real estate holdings will shake out well for creditors of its Canadian operations. He is more hopeful about recoveries from the liquidation sales of clothing and other goods.

“They could make a pretty good recovery on it if it goes well,” he said. “(In) the liquidation of Eaton’s … the creditors ended up doing OK; much better than most insolvencies.”

• Email: bshecter@nationalpost.com

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