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Tops reorganization plan turns equity over to debt holders

Tops Markets has come up with its plan to bring the supermarket chain out of bankruptcy – the last remaining piece in its efforts to restructure its business.

One day after announcing that it will close 10 poorly performing stores, Tops on Friday released its long-awaited restructuring plan that it says will make the supermarket chain more financially viable by reducing its interest payments and shedding more than half of its $715 million debt load.

The plan will leave Tops under the ownership of the hedge funds and investors who hold roughly $560 million in current borrowings that are secured by the company's assets. But the plan also indicates that Tops current management, under CEO Frank Curci, will remain in place.

After striking deals earlier this summer with the Teamsters and the United Food and Commercial Workers unions to reduce big pension liabilities owed by the company – and also reduce workers' retirement benefits – this week's store closings and the filing of the reorganization plan on Friday are accelerating Tops' final push to emerge from bankruptcy, possibly within three months.

The plan will reduce Tops' debt, which exceeded $700 million at the time the company filed for bankruptcy in February, by $455 million. The company's interest payments on that debt, which reached $80 million a year before the bankruptcy filing, will be reduced by about $36 million, according to documents filed in U.S. Bankruptcy Court.

Tops plans to close 10 stores across the state it says are underperforming

"The filing of our plan moves Tops another step closer to a successful completion of our financial restructuring," Curci said.

The plan will leave Tops with a capital structure that he believes will be more sustainable and also give the company more financial flexibility to fund its operations going forward.

Tops, which had essentially run out of cash before the bankruptcy filing and was forced to drastically pare back its capital spending, will have new sources of liquidity that it will be able to tap into once the restructuring plan is approved by the court and the company's creditors. The company's financial advisers also believe that Tops' cash flow will be stronger once it emerges from bankruptcy.

Approval of the plan could come as early as mid-November, and Tops said it hopes to emerge from Chapter 11 by the beginning of December. The Bankruptcy Court is expected to hold a hearing on the restructuring plan on Sept. 27. The investment firms that hold 87 percent of Tops' secured debt, which makes them the most influential players in the reorganization, have indicated that they support the plan.

But the documents that Tops filed with the Bankruptcy Court on Friday indicate that, even by its own projections, the restructured supermarket company, with its 159 remaining stores, will remain on a financial tightrope.

Even with its reduced debt burden, Tops projects that its interest expenses will wipe out most virtually all of its operating profits over the next three years. Tops projects that it will lose around $13 million in 2019 and roughly break even in 2020 and 2021.

That's because Tops' reduced borrowings remain costly because of the high interest rate the company is being forced to pay. With its shaky finances and the ripples caused by its bankruptcy filing,  lenders view Tops as being extremely risky. A term loan that Tops is taking out carries an interest rate that starts at 9.5 percent and will go even higher if interest rates increase. Its second lien notes have a 13 percent interest rate.

So even though Tops' debt will be cut by more than half to around $295 million after it exits bankruptcy, its interest payments still are expected to exceed $55 million a year.

And nothing has changed in the hotly competitive grocery business across upstate New York, where falling food prices and stagnant or declining populations have made it hard for Tops to compete against the likes of Wegmans, Walmart and deep discounters like Aldi, said Burt Flickinger, the Buffalo native who is the managing director at New York City retail consultant Strategic Resource Group.

That competition could get even stiffer if Lidl, a German discount grocer that's similar in format to Aldi, moves into upstate New York, or if BJ's Wholesale Club, which is flush with cash following a recent stock sale, expands or upgrades its grocery offerings, Flickinger said.

That competitive market is one reason why Tops decided to keep the company operating and reorganize, rather than put the company's supermarkets up for sale. Tops' financial advisers estimated that selling off the business would have yielded only around $230 million to $286 million, which would have been barely enough to pay off the debt obligations it incurred during bankruptcy. That would have left only around $7 million to $66 million to pay off its secured debt holders – a payoff of only about 10 cents on the dollar.

By restructuring, the debt holders, as the new equity owners of the business, have a chance to recover more of their losses if Tops is able to stabilize its business and gradually become more profitable, as its projections indicate. That would allow the debt holders to eventually sell their stake in Tops a few years from now, although Flickinger cautioned that the upstate grocery market, with the region's subpar economic growth, is not the type of market that is likely to attract widespread interest from buyers or robust bidding.


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