LNT Plan Almost Ready
July 14, 2008,
Two-and-a-half months into its bankruptcy, Linens 'n Things remains focused on staunching its losses, normalizing vendor shipments and generally dealing with the trauma of life under Chapter 11. And while it has yet to publicly discuss even the seedlings of a reorganization plan with most of its creditors, a business plan now appears to be all but completed by interim ceo and chief restructuring officer Michael Gries.
The plan itself remains under strict secrecy covenants and is still being fine-tuned. But references in court documents, hearing transcripts and comments by bankruptcy professionals indicate it will likely seek the sale of all or part of the company through an auction and hopes to effectively emerge from bankruptcy sometime around February of next year, after the critical holiday selling period when LNT's balance sheet should be at its strongest.
A list of targeted investors the chain is being marketed to was redacted from court documents, but other indications suggest that there are global as well as domestic investors who have indicated at least some level of interest. But capital markets remain shaky, and banks along with investors have been showing much greater aversion to risk in recent months.
Indeed, a recurring undertone in the court proceedings among the lawyers and the judge involves questions about the possibility of a conversion to a Chapter 7 or 11 liquidation. The concerns are understated and without much drama, some might suggest merely pro forma — but their frequency suggests the concern is widespread.
"The long-term plan is certainly to be sure that this company exits bankruptcy as a viable, ongoing entity," offered Mary Ann Domuracki, managing director of Financo, which along with Genuity Capital is one of two private investment banks attempting to market the retailer. Genuity is focused on LNT's Canadian stores. Domuracki declined to identify potential investors or buyers.
"Whether that means it can do so as a stand-alone business with the current group of stakeholders — a combination of Apollo [and other] noteholders — or a new buyer altogether, the goal is be sure this company exits solid as an ongoing entity."
This optimistic scenario has clouded not only questions over LNT's ability to realize the benefits of shuttering more than a third of the chain, but by a whole range of factors outside of its control: consumer confidence, the housing market, and the state of the retail real estate market, to name just a few. None of that even begins to address LNT's acknowledged need to improve its merchandising and market position.
"Rescue financing, or stressed financing, is not as readily available as it used to be," Domuracki added. "So I think the capital markets are a big part of it. The economy doesn't help, but the economy has been in trouble before."
Add to that an overabundance of retail space already in the marketplace that would suggest LNT's lease auctions will likely bring in less than hoped-for results. With the first round of 120 store closings winding down, the lease auction process is underway with a bid deadline of July 21.
But while admitting that the marketplace is saturated with vacancies, Andy Grazier, co-ceo of DJM Realty, the Gordon Bros. subsidiary handling the lease auction, continued to argue that the intrinsic value of the LNT real estate remains strong — it simply may take longer to realize. He could not answer just how long, or whether LNT could afford to wait.
Yet, two events last week are believed to be critical to LNT's short-term potential: its plan to conduct a second round of 87 store closings in addition to 120 already being closed, and the launch after court approval of its "Trade Vendor Payment Program."
That payment program established a $100 million letter of credit that makes available to LNT $200 million in goods, with the half-payment assured with terms of 45 days or longer. In order to qualify, suppliers who withheld goods but received payments around the time of the bankruptcy filing would either have to refund the monies or ship the goods.
"This is, as far as we are concerned, the most important and critical motion thus far in this case," offered Glenn Rice, a creditors committee attorney, during a hearing on the program. "And we all hope it succeeds in producing the type of credit and terms that it is designed to create."
Rice noted that post-petition trade vendors — administrative creditors — used to be routinely paid for their continued support of a bankrupt firm, but with the advent of second-lien debt about a decade ago, those trade vendors often ended out of the money, subordinated to the newer class of secured creditors. He cited, in particular, the bankruptcies of Caldor and Ames. That, he said, was the situation with LNT.
"This company had about $1 billion or $1.2 billion of secured debt on the balance sheet. And the focus of, at least, our attention from the time of the formation of the ad hoc committee [of creditors] five or six weeks before the filing, right up through today, was how are you going to induce the vendors to go back to normalized terms if, in the event of a liquidation, they don't get paid as an administrative creditor? … The alternative was to find another mechanism in which vendors can ship, again, on terms satisfactory to the company with no problems about getting paid most, if not all, of their administrative claims."
But more critically, the program will free up liquidity under LNT's DIP financing, essentially cutting its cash outlays for merchandise in half, with much longer terms. Able to stock up fewer stores faster, it presumably will be in better shape going into the back-to-school season next month and the holiday sales period beginning in November, lawyers argued.
The second round of store closings had been under consideration since before the company filed for bankruptcy, attorneys and Gries stated. The only question was how many more stores should be closed. That number is 87, for now.
"The company was focused on developing its business plan and the initial phases of the bankruptcy process," offered Financo's Domuracki. "And that's been the focus of the entire group, including ourselves: just being supportive of the company getting product. That was a pretty big event for them. So the next step is, we'll just see where it goes."
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