The 13-Week Cash Flow That Didn't Add Up
Summit Sports Inc., a 22-store regional retailer, obtained an initial order under the CCAA. It has $1.1 million of cash, a $6.2 million DIP commitment, and a 13-week cash-flow forecast showing a minimum cash balance of $350,000 in week 9. The monitor's review identifies three problems. First, the forecast assumes $2.8 million of inventory receipts on 60-day supplier terms, but the key supplier now demands cash on delivery. Second, rent deferrals with landlords are still being negotiated and are not reflected as a risk. Third, the forecast includes $900,000 of savings from closing 8 stores, but those leases have not been disclaimed. The DIP lender requires minimum liquidity of $500,000 by week 6 and a revised forecast. The largest landlord, which controls three anchor locations, has threatened to terminate access if it is not paid. Management wants to keep all stores open through the holiday season, eight weeks away.
1. Assess the reliability of the 13-week forecast. Identify the adjustments the monitor should make and estimate the effect on the week 6 liquidity covenant.
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The forecast is not reliable as presented. The monitor should rebuild it on a receipts-and-disbursements basis and isolate the three assumptions. First, the $2.8 million of inventory receipts on 60-day terms assumes trade credit that the key supplier has withdrawn. On cash on delivery, the company must pay at receipt, so the timing shift can consume up to $2.8 million of liquidity earlier than forecast. Second, the rent deferral is not an executed agreement; the monitor should add back the contractual rent for all landlords, or at least run a scenario in which no deferral is granted. Third, the $900,000 of store-closing savings is contingent on lease disclaimer; until a court order is obtained, those costs remain. A simple downside case: if only half of the COD shift hits by week 6, and one month of rent is added, the forecast's $350,000 minimum cash becomes negative before the $500,000 covenant date. The monitor should also check that DIP proceeds are not double-counted, that professional fees and critical supplier payments are included, and that the company has not assumed it can use restricted cash. The week 6 covenant is likely to be breached on a realistic case, so the monitor should tell the board immediately and require a revised 13-week forecast with weekly variance reporting.
2. Recommend a board action plan to address the liquidity covenant and landlord risk, including whether to seek a DIP amendment, disclaimer of leases, or a sale process.
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The board should stop treating the holiday season as a reason to keep all stores open. The immediate priority is to avoid a covenant breach and preserve the DIP. The board should ask the DIP lender for a short waiver or an amendment to the minimum liquidity covenant while a revised forecast is prepared, and should offer enhanced monitoring, a cash-collateral budget, and a milestone schedule. In parallel, management should negotiate with the key supplier for partial credit or a critical supplier arrangement, and seek a court order under the CCAA if necessary to ensure supply on commercially reasonable terms. On landlords, the company should prioritize the three anchor stores, pay only what is necessary to preserve access, and bring a disclaimer motion for the eight unprofitable leases rather than assuming savings. A sale process should be started now, not after the holiday season; a stalking horse or a recapitalization may preserve more value than a slow liquidation. The board should also prepare a contingency plan for receivership or bankruptcy if the DIP lender refuses to amend. Directors must act in the best interests of the corporation and creditors, not just shareholders; continuing to burn cash without a realistic path is not defensible. A revised forecast should show the covenant on a base case and a downside case, with clear actions to cure any shortfall.