Clock Continues to Tick for Daffy’s

The off-price chain is still trying to negotiate a deal with its lenders, but it remains unclear which direction — a sale or a bankruptcy filing — it is headed.

It appears banks are playing hardball with Daffy’s. Credit sources said Tuesday that banks haven’t been pleased with monthly results since April. As it seeks a way to ensure a future, the firm continues to work with legal advisers Weil, Gotshal & Manges. The retail chain has been in talks with lenders for over a month without a resolution in sight.

This story first appeared in the July 11, 2012 issue of WWD.  Subscribe Today.

While Weil has been working with Daffy’s as its counsel for some time, on Tuesday sources said the law firm now is on a separate track involving a bankruptcy filing in case that was necessary.

Initially, some credit sources in late June were discounting the bankruptcy rumors as just talk from angry buyers who had been told to take an unanticipated vacation while the chain was trying to reach an agreement with lenders.

Marcia Wilson, Daffy’s chairman and chief executive officer, did not return a call for comment.

A spokeswoman for Weil said: “Daffy’s is a long-standing client of Weil, Gotshal & Manges. It is our policy to keep all client matters confidential.”

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Another financial source familiar with the ongoing negotiations at Daffy’s said that solicitations had been sent to several liquidation firms as well, as the retail chain seems to be pursuing all possible options.

One of those individuals said a buyer might materialize from someone interested in the real estate, but that left the question of whether such a play would allow the company to continue as a business. Moreover, it wasn’t clear how the real estate was owned, whether it was via the company or through a separate holding firm. The other source believed that a few of the real estate assets might be held outright by Wilson.

Speculation on the real estate assets is occurring as some creditors are wondering what their return might be should an agreement with Daffy’s lenders not happen. In that scenario, Daffy’s is likely to file a petition for Chapter 11 bankruptcy court protection unless it can find a buyer.

Even though it remains unclear which direction — a sale or a bankruptcy filing — the retailer is headed, many are of the opinion that it may not matter in the long run. Some feel that the writing is on the wall, given the extensive competition from firms in the off-price space, many of which do a better job and carry well-known brands.

That’s not to say that it couldn’t find an alternative financing arrangement, but those firms who lend is this area typically charge higher fees due to the perceived risk involved when lending to a distressed firm. The other concern is how much time the alternate financing for a commercial loan would buy and whether it is worth the additional costs.

The $150 million, 19-unit retailer hasn’t paid invoices from vendors since May.