What’s the conclusion? There is virtually zero optionality on many operating leases – for more companies than Goody’s. Their respective values are simply under water – or just so inflexible given anchor tenant status such that hurdles are too high to attract bidders. In other words, the properties need to be ‘marked to market’, instead of ‘marked to model’. Unfortunately, this is not done proactively by most CFOs, it is done in a bankruptcy court.
This is a great example as to why I look at more than debt levels in evaluating bankruptcy candidates. The key is to pinpoint REAL debt (capitalizing operating leases) and adjusting for the duration and/or flexibility of those leases. This is a key theme I discussed on our 7/16 bankruptcy conference call, and continue to think will be front and center for a while.