By and  on May 23, 1994

NEW YORK -- Federated Department Stores said Sunday that although Burton R. Lifland, chief bankruptcy judge, has specifically directed R.H. Macy & Co. to file its reorganization plan, Federated will continue to meet with Macy's creditors.

On Friday, Lifland's directive to Macy's in effect appeared to temporarily toss aside proposals by its suitor, Federated, and by bondholders, as inadequate.

Lifland's decision triggered wide speculation that Macy's will file a plan within four to six weeks, well before its exclusivity period expires on Aug. 1. In its statement, Federated said, "We believe our May 9th reorganization proposal, and the possible enhancements discussed with creditors last week, provides more value to all creditor constituents than does Macy's stand-alone proposal.

Federated also said it will continue to meet with Macy's creditors "in an effort to develop a plan of reorganization that will maximize recoveries by all creditors."

[On Friday, prior to its annual meeting, James M. Zimmerman, president, of Federated, called the company's Macy bid a "win-win situation."] Allen Questrom, Federated's chairman and chief executive officer, said, "Our primary objective when we entered the Macy reorganization case was to create a $14 billion department store operation that would create substantial synergy values through operating efficiencies, geographical diversification and increased customer service and value.

"While we recognize that there necessarily can be no certainties in Chapter 11, we remain hopeful that we can work through the bankruptcy process to accomplish our objective."

Meanwhile, exclusivity gives Macy's the advantage of filing a plan in bankruptcy court before any other party. This holds appeal for creditors who want a payout as early as possible.

A reorganization plan is a definitive document outlining the reorganization strategy. The proposals, called term sheets, are truncated versions of reorganization plans.

Lifland's directive does not preclude Federated or some other party from submitting a competing plan, and for that reason, Cyrus R. Vance, the court-appointed mediator, will continue the mediation process. However, any competing plan would have to be clearly superior to the Macy filing for the court to consider it. On Friday, Vance issued a short statement saying he had met with Lifland, who is presiding over the Macy Chapter 11 proceeding, and that Lifland is "of the view that substantial progress has been made in the mediation process." On that basis, the statement said, Judge Lifland has directed Macy's to file a plan as soon as possible.Vance had no further comment.

Asked if Lifland was giving Macy's the inside track on its competitors in its effort to produce a consensual plan, a source close to the negotiations said, "That seems to be the case."

The source noted there were several factors that went into Lifland's decision, including the fact that the parties could not reach a consensus regarding Federated's proposal and that Macy's bondholders have now thrown their support behind Macy's proposal.

Sources believe Federated's inability to come up with a superior proposal convinced bondholders to back Macy's proposal. In addition, Macy's has sweetened its offer to junior bondholders, who had been opposing the Macy's plan, by offering them approximately $10 million in gift certificates. There may have been some other incentives, though most believe that Macy's revised term sheet, submitted April 29 along with those from Federated and the bondholders, has not been dramatically revised. Macy's valued its distribution to creditors at $3.6 billion with another $260 million to be distributed in the form of warrants and stock purchase rights.

Lifland also reportedly believes that the value of Macy's has increased significantly, possibly as much as $800 million, since it filed for Chapter 11 in January 1992. Macy's has cut costs and has been meeting its business plans.

Macy's had no comment on Sunday.

Vance did not mention Federated's proposal or the one made by bondholders in his announcement, which the source close to the negotiations said was intentionally done to downplay proposals other than Macy's.

Another source said Friday's statement represents good short-term news for Macy's, which is privately playing it up like a victory, "but it's not the end." Macy's principals reportedly are meeting this morning over breakfast for an update on the company's progress. "Federated has made a lot of progress with secured creditors, but the king makers here have been the unsecured. That's been the swing vote," the source added.

Concerning the timing of Macy's emergence from Chapter 11, the source said Macy's should still emerge from bankruptcy's clutches roughly by Christmas time, in accordance with Macy's own timetable.

For some, though, Vance's announcement Friday raised more questions than it answered. Arthur Steinberg, representing Macy's bank syndicate creditors, was among those looking for an explanation.He said he asked Michael Sigal, Vance's lawyer, what the release meant with regard to Federated's proposal for reorganizing Macy's and was told, "It's up to you to decide if Federated is in or out."

"I truthfully don't know what that means," Steinberg said.

Bret Miller, of Otterbourg, Steindler, Houston & Rosen, counsel to the creditors' committee, was similarly confused by the release, saying, "I don't know what it means."

One retail expert's interpretation was,"All Lifland is doing is going back to his original statement of February, giving Macy's first crack at filing a reorganization plan, [through granting an exclusivity period]. It is a reaffirmation of his ruling."

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