It won't be clear sailing for Tops Markets as it tries to revamp its business in bankruptcy court.
Representatives of a Teamsters union pension fund are asking a bankruptcy court to reject a key agreement between Tops and C&S Wholesale Grocers, its main grocery supplier, claiming that it's a bad deal for the supermarket chain.
Not so, say Tops officials. They argue that the deal is essential for the supermarket chain to succeed in its efforts to restructure its business in bankruptcy and emerge, perhaps as soon as this summer, as a more financially viable and stable company.
Either way, the objection by the New York State Teamsters Conference Pension and Retirement Fund is the first sign that at least some of Tops' creditors are not on board with the supermarket chain's plan to ease its suffocating interest payments by swapping much of the more than $700 million in debt owed to a handful of big creditors for an equity stake in a restructured business.
It also is a sign of the contentious relationship between Tops and the Teamsters fund, stemming from a separate dispute over the retirement fund's claim that Tops could face a pension liability of more than $180 million.
Tops representatives noted that the Teamsters fund is the only creditor to file an objection to the agreement, and said the fund's "calculated litigation tactics" were a way to gain leverage in the separate pension dispute involving workers at a former Erie Logistics warehouse that Tops acquired from C&S in 2013.
Since the warehouse acquisition, there has been a dispute between Tops and the pension fund over how much the supermarket company might owe on its pension obligations – a sum that potentially could top $180 million. The pension dispute is scheduled to move into mediation during the first week in May.
"It is not clear to Tops why you would object on any basis, other than for perceived leverage in connection with negotiations relating to the withdrawal liability claim," said Richard W. Slack, an attorney representing Tops, in a letter to Teamsters fund attorney Vincent M. DeBella.
DeBella said suggestions that the pension fund filed the claim as a way of gaining leverage in the pension case "is belied by the facts."
To the contrary, DeBella said, it has been Tops that has been using the possibility of negotiations over the pension claim as a way of trying to persuade the Teamsters fund not to pursue its objection to the supply deal.
At issue is a proposed agreement between Tops and C&S, the company that supplies more than two-thirds of the items that the supermarket chain sells in its 174 stores.
Tops, in the days leading up to its bankruptcy filing last month, hammered out an agreement with C&S so it would continue supplying goods to Tops in bankruptcy, keeping its shelves stocked at a crucial time when consumers were learning about the chain's weak financial position.
Tops, in asking the bankruptcy court to approve the deal so it can remain in place throughout the restructuring, also said it provides other benefits to the cash-strapped company. It gives Tops an extra week – interest-free – to pay C&S and allows it to keep collecting about $2.4 million a week in rebate and promotional payments that C&S collects for Tops from its vendors.
Together, the extension provides Tops with between $20 million and $25 million a week in extra liquidity and further saves the company money by allowing it to avoid tapping into its existing financing arrangements, which would require it to pay interest on anything that it borrowed.
In return, Tops would immediately pay $38 million of the $56.5 million it owes to C&S, providing the grocery wholesaler with quicker access to those funds than if it were forced to wait for the payment until the bankruptcy process was completed. Tops said the deal means that C&S simply would be paid part of the $56.5 million sooner, rather than later.
The agreement "is a very good and sound business deal for the debtors," said Michael Buenzow, Tops' chief restructuring officer. The proposed deal "is in the best interests of the debtors, its creditors and all other stakeholders."
Teamster pension fund representatives disagree. They argue that the proposed agreement is a bad deal for Tops that requires more scrutiny by the court.
Contrary to Tops' claim that it will enhance its liquidity, the pension fund argued that it would be a drain on the company's cash flow, paying C&S $38 million in exchange for arrangements that will enhance liquidity by only $23 million.
Buenzow, however, said nearly $13 million of the proposed payment to C&S was for meat and other perishable items that are granted priority status under federal bankruptcy law. That means C&S would be paid for those items regardless.
The main concession to C&S in the proposed deal, Buenzow said, was allowing it to be paid $25 million months earlier than it otherwise would have been able to collect, roughly matching the amount of increased liquidity Tops will receive through the agreement.
The proposed agreement also sends a reassuring message to Tops' creditors and its customers by helping to keep its store shelves fully stocked, he said.
The proposed deal "creates a stable relationship with the company's largest supplier, which sends a message to other vendors that the company's business is stable," Buenzow said.
The Teamsters fund, however, said Tops hasn't indicated whether it considered other potential ways to increase its liquidity. And the fund also said the court should carefully examine the relationship between Tops CEO Frank Curci, who more than a decade ago worked as chief operating officer at an Alabama-based supermarket chain owned by C&S.
Tops said it is illogical to imply that Curci would act in the interest of C&S, especially since he is majority owner of Tops' management-backed ownership group.