Linens 'n Things Creditors Seek to Broaden Probe

Brent Felgner, November 17, 2008

The Linens 'n Things creditors committee is seeking to broaden its probe into the retailer's financial dealings involving investors, management and professionals during the period from its going-private transaction in 2006 to its bankruptcy filing last spring.

Last week, The Official Committee of Unsecured Creditors sought bankruptcy court approval to subpoena documents and compel testimony from National Realty & Development Corp. (NRDC), an investor that, along with Apollo Management and Silver Point Capital, bought the retailer in a heavily leveraged $1.3 billion buyout. The committee won a similar approval — known as a Rule 2004 investigation — last month involving Apollo.

The committee's constituents, including many trade creditors, are considered likely to finish mostly or completely out of the money following LNT's liquidation, largely because of its heavily collateralized debt structure of more than $650 million. The inquiry might yield its last best hope for a financial recovery if any of those dealings turn out to be actionable.

The probe itself seeks to venture deep into the LBO transaction, as well as the movement of cash upstream, and the investors' involvement in the business and decision-making.

One of LNT's noteholders, Levine Leichtman Capital Partners, is conducting a similar court-sanctioned inquiry. As a group, the noteholders have largely divergent interests from the first-tier secureds and from the unsecured creditors.

In the meantime, a Dec. 17 sale hearing has been scheduled to ratify the results of two auctions and private sales to dispose of the chain's leaseholds. The first, smaller auction is scheduled for Nov. 20 and the second, involving the bulk of the remaining stores, is slated for Dec. 4.

Under the order, LNT will also have the right to dispose of the leases in private sales, if no competitive bidders emerge. The glut of retail space coupled with a sagging business environment have drastically inhibited the stores' marketability to this point. For example, the court just this month approved the sale of LNT's Palmdale, Calif., store to Smart & Final, which bought several leases in the original auction. The sale price for Palmdale: $100,000.

The stores' going-out-of-business sales are also fighting headwinds; as discounts moved deeper, last week customer traffic was still light to moderate in many stores. To further aid the store sales, LNT last week launched 10-second television ads hyping discounts of up to 60%.

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