Many brick-and-mortar retailers in Texas and around the country are struggling. Soaring inflation and fears of a coming recession have dampened consumer spending, and online marketplaces like Amazon have made the retail sector far more competitive. Several prominent retailers have sought bankruptcy protection in recent months, and Party City joined their ranks on Jan. 17. The New Jersey-based company disclosed $10 billion in liabilities compared to just $1 billion in assets in its Chapter 11 filing, but executives have secured a financing package and expect the company to emerge from bankruptcy stronger and more resilient.
A confluence of issues
Like many other retailers, Party City has been struggling to cope with a confluence of issues in recent years. Sales of party decorations, costumes and balloons have fallen as consumers tighten their belts, and many people still feel uncomfortable attending social gatherings. Party City has also faced crippling supply chain problems including a sharp rise in the price of helium. The company responded to these challenges with a marketing push that led to an 11.2% increase in sales compared to 2019 figures. However, this increase in revenue was more than offset by an unprecedented rise in overhead costs.
Debtor in possession financing
Prior to filing its Chapter 11 petition, Party City negotiated a financing package with a group of bondholders that own more than 70% of its first lien debt. The company has also secured $150 million in debtor in possession financing that will be used to pay employees and vendors while the company is restructuring. Lenders who provide debtor in possession loans are given priority when a bankrupt business’s assets are liquidated, which is why some of Party City’s creditors took legal action to stop the financing package. A bankruptcy judge in Texas rejected their arguments and gave Party City immediate access to $75 million. A second hearing is scheduled to take place on Feb. 24.
Chapter 11 protection
Chapter 11 bankruptcy gives struggling companies the time they need to recover from financial setbacks and restructure their operations and debts, and it also opens up opportunities for financing that would otherwise be unavailable. Party City has faced problems in recent years that no retailer could have anticipated, but the company seems to have put a solid plan into place to keep most of its 800 stores open, save jobs in hundreds of communities and conserve an iconic part of the American retail landscape.