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Clock is Ticking for LNT

Linens 'n Things Seeks Relief from Debt

When the UPS truck pulls up to the Linens 'n Things store at Legacy Place these days, it is much more likely to be delivering or picking up an inter-store transfer of merchandise than it is to be delivering fresh, new goods from a supplier or a company distribution center.

Indeed, while the retailer's DCs continue to push merchandise through their outbound doors, their inbound deliveries by now have slowed, as supplier after supplier has cut the $2.8 billion specialty retailer off. LNT, which had slowed vendor payments in recent weeks, finally notified at least some vendors it would stop making any payments at all, according to several suppliers. For others, it simply missed a promised payment.

And while a bankruptcy filing was expected as early as last week, the retailer's executives instead met with an ad hoc group of creditors on April 14. The committee, apparently dominated by factors and credit insurers, reportedly also included at least some suppliers. The following morning, LNT announced it would skip making a $16.1 million interest payment on its $650 million in debt notes with the forbearance of the issuers until May 15 — and the tolerance of its credit lenders until May 13.

"I don't know what their thinking is about this. I don't know why they would wait or what this will accomplish for them," said Jonathan Sadinoff, evp of Beacon Looms, whose company was one of the last to keep shipping LNT. "We're not dealing with LNT anymore — it's Apollo."

Some believe that if putting off the payment obviates the need to file for Chapter 7 liquidation and allows LNT time to put together a pre-packaged Chapter 11, suppliers would be better off.

Rather than embrace a bankruptcy filing as a shelter from creditors' claims, LNT along with its principal owner, Apollo Management, is working hard to do everything it can to avoid bankruptcy. At least one reason why: the owners might lose control of the company — and their investment in it — to secured creditors, who could simply decide to liquidate.

"We are committed to exploring all reasonable avenues in our effort to strengthen the company and to adopt a financial solution that recognizes the inherent value of the Linens 'n Things business," said Robert DiNicola, chairman and ceo in a statement.

That may test the patience of at least a few trade creditors whose credit insurance for the retailer expires before the mid-May LNT deadlines, possibly leaving them exposed for the full outstanding amount of the retailer's payables.

But with dwindling amounts of fresh merchandise reaching its stores, LNT has taken to emptying out trailers, warehouses and backrooms of aging goods.

"What's happened is not unusual," offered Gilbert Harrison, chairman and ceo of Financo, which has been brought in to help find a business combination or investor. "They have had to clean out all sorts of trailers stuffed with old product, off-site stuffed with old product — I mean Bob has had a Herculean task over the last few years."

Even by the most optimistic yardstick, LNT probably has about three weeks to find the magic bullet that will keep it out of bankruptcy. In addition to deferring the interest payments to give it some breathing room and perhaps pay for some COD shipments, the retailers has, according to the company or people familiar with the situation:

  • Retained at least two retail liquidators to conduct inventory valuations and store closing assessments in upward of 100 stores;

  • Placed its 40 Canadian stores on the block;

  • Hired financial and crisis advisors — Conway Del Genio Gries & Co. and Financo — to search for bankruptcy-saving options, including a possible buyer;

  • Hired a public relations firm — MWW Group, which has worked with several other troubled companies — to put on the public face it wishes to present while it searches for answers.

Some suppliers expect the chain to shutter up to 125 or 135 stores.

But Harrison said he'd prefer not to see the stores sold off or shut down.

"Frankly I'd like not to see the Canadian stores sold; I think they are critical to the long-term strategy," he said. "We'd like to see as few stores closed [as possible]. The sick stores closed, not long-term viable stores closed. You're looking at restructuring, you're looking at capital infusion, you're looking at some kind of combination — those are basically the things you're looking at."

But while LNT, which posted a net loss of $154.4 million for 2006 and a deeper loss of $242.1 million for 2007, struggles for relief, credit agencies such as Moody's and Fitch Ratings, have downgraded its debt further.

"The downgrade reflects Fitch's concern that default is imminent given that LIN has decided to defer its $16.1 quarterly interest … Fitch is monitoring LIN's ability to sustain operations and the potential for a bankruptcy filing," the company noted.

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