Spiegel Faces Credit Crisis

Stung by obligations connected to its credit card operations, Spiegel said it may not have sufficient funds and is actively seeking help.

NEW YORK — Stung by obligations connected to its credit card operations, Spiegel Inc. said in a regulatory filing Tuesday that it may not have sufficient funds for future operations and is actively seeking help.

This story first appeared in the February 26, 2003 issue of WWD.  Subscribe Today.

According to the latest SEC filing, Spiegel is anticipating a liquidity crunch as a result of its inability to meet certain minimum-performance requirements in connection with some of its asset-backed securities transactions that underlie its credit card operations. First Consumers National Bank (FCNB), Spiegel’s special-purpose bank, issues private label credit cards and both MasterCard and Visa bank cards. About 41 percent of the company’s sales in 2001 were made via its private label credit cards.

Spiegel securitizes the receivables generated by use of both types of cards. Under those agreements, the failure to meet minimum performance requirements triggers a so-called payout, or early amortization, event in which investors are repaid principal on an accelerated basis. The problem for Spiegel is that if the payout event is triggered, excess monthly cash flow ordinarily used to fund operations would have to be diverted to repay investors.

The firm, based outside Chicago, also told the SEC that it was taking steps to hire a restructuring adviser. Many credit sources and hedge fund managers believe that the restructuring expert might presage a Chapter 11 filing. Some believe that even a sale of the Eddie Bauer division might not be sufficient to heal Spiegel’s deep fiscal wounds.

The next reporting period for Spiegel ends on Feb. 28, and the company said in the filing that it “presently expects” to fail to meet the requisite performance minimums.

Spiegel said in the filing that it is in receipt of a letter from the Office of the Comptroller of the Currency approving the sale or liquidation of FCNB’s bank card portfolio by April 30, but also said it plans to remain in the private label credit card business because sales are “extremely important to its merchant operations, particularly its catalog operations.”

Earlier this month in a separate filing with the Securities and Exchange Commission, KPMG, the auditor for the catalog firm and parent of the mall-based specialty nameplate Eddie Bauer, expressed doubts about the company’s future. The opinion letter was sent to Spiegel’s board, and included with a Feb. 4 SEC filing. KPMG said that Spiegel was not in compliance with certain debt agreements and that “substantially all of the company’s debt is currently due and payable.” The auditor also said the firm has been unable to renegotiate agreements with its lenders.

Spiegel for the last year has been quietly trying to stay afloat amid business difficulties and losses. It hasn’t talked to credit analysts and has yet to file its year-end and quarterly statements. Its fiscal 2001 report, delayed until just this month, said the company lost $397.7 million, or $3.01 a share, for the year ended Dec. 29, 2001, versus net income of $120.8 million, or 92 cents, in 2000.

Jim Rice, senior vice president at Bernard Sands, said, “We haven’t been able to recommend Spiegel because they haven’t been giving out any information for a very long time.”

The company is still looking to fill the chief financial officer post vacated by James R. Cannataro’s resignation on Feb. 12. He became executive vice president for the U.S. arm of Nintendo Co.

Eddie Bauer, which closed about 43 stores last year, is expected to shutter a unit in downtown Santa Fe, N.M., sometime in the next month. Eddie Bauer, acquired in 1988 from General Mills, has about 500 sites throughout the country, as well as a catalog operation and Internet site. The company also cut 300 full-time and part-time call center staff at the end of January. Sources said that the layoffs were due in part to lackluster sales from holiday. Call center operations handle orders for Eddie Bauer, Spiegel’s core catalog operation and Newport News, another catalog division.

In addition to an ongoing shareholder lawsuit, Spiegel is under investigation by the SEC over its late filings.

Still to be determined is how willing Spiegel’s majority owner, the Otto family from Germany, would be to continue bankrolling the distressed firm. Michael Otto is Spiegel’s chairman, and the family is said to have loaned Spiegel about $350 million in the last two years, financial sources said. The Otto family is no stranger to mail-order firms. It owns Germany’s Otto Versand GmbH & Co., the world’s largest catalog company, as well as trendy home furnishings catalog Crate & Barrel.

A year ago Spiegel traded at about $10 on the Nasdaq, but was delisted on June 4. It trades over the counter on the pink sheets, where it closed on Tuesday at 18 cents, down 1 cent. Spiegel’s lead bank lender is Deutsche Bank AG.