The Barneys New York in Scottsdale.

Sources say billionaire hedge fund manager Ron Burkle is in the final stages of purchasing some of Barneys New York’s debt from Citibank.

Ron Burkle’s evolution from food to fashion may be ready to take another step.

This story first appeared in the November 20, 2009 issue of WWD. Subscribe Today.

Sources said Thursday that Burkle’s Yucaipa Cos. investment vehicle, which previously has taken stakes in Sean John and Scoop, is in the final stages of purchasing some of Barneys New York’s debt from Citibank.

“We know Yucaipa bought some of it,” said one financial source.

“It has more to do with Citibank,” which is struggling and anxious to shore up its finances. “But it also shows a recovery in pricing of Barneys’ debt,” said another source familiar with the deal.

It is believed the amount of debt Yucaipa will own will be less than that of Perry Capital. That hedge fund is headed by Richard Perry, husband of designer Lisa Perry.

The Yucaipa deal creates the potential for a battle one day for control of Barneys between Burkle and Perry if debt holders were to push to swap their debt for equity and assume control of the retailer. However, Barneys owner Istithmar World Capital, as well as executives at the store, have said on more than one occasion that the Dubai-based fund is not selling the company. Istithmar paid Jones New York more than $900 million for Barneys in 2007.

“These people are circling to see if they could take this thing over,” the financial source said of Yucaipa and Perry.

However, none of the debt holders can force Barneys to restructure so long as the embattled retailer keeps up with interest payments. The debt doesn’t start maturing until 2014, so Barneys has some breathing room to meet its obligations as it waits for the economy and retailing to recover.

Perella Weinberg Partners, an asset management company, earlier this year was hired to help restructure Barneys’ debt. On the books, there is about $500 million in long-term debt, including a $270 million term loan maturing in 2014 and a mezzanine loan of about $230 million maturing in mid-2016.

There also is a revolving credit arrangement which, based on available working capital, varies from month to month and matures in 2012. The balance is currently $80 million. Barneys’ lead banks are Citibank, Wells Fargo and HSBC.

Interest costs, depreciation and sales declines put Barneys in the red last year on a net basis, though earnings before interest, taxes, depreciation and amortization were positive. As for 2009, the company — with eight flagships, two regional stores, 19 Co-ops, 13 outlets and three warehouse sale locations — is projected to reach sales of about $675 million, down from $750 million last year, but generate a small operating profit.

Standard & Poor’s in April rated Barneys’ debt “CCC” with a negative outlook, in part because the company required a capital infusion earlier this year. Istithmar pumped in $25 million to release vendor shipments and ease liquidity concerns. There also have been merchandise initiatives with designers to lower prices and provide greater value.

Companies that are not able to be self-sufficient from a liquidity standpoint merit a ‘CCC’ rating,” said David Kuntz, S&P debt analyst. “Our expectation is that, given the challenges among the luxury retailers, things are going to be very difficult going forward.”

Kuntz said it could be hard to gauge the impact of activist investors on the company’s credit rating.

“When we determine a rating, we look at a number of different factors — governance, financial policy, ownership structure and clearly management,” he said. “In the absence of a [chief executive officer], it is difficult to get a sense of management’s strategy and direction.”

Howard Socol, the last ceo of Barneys, retired in July 2008 and Istithmar has yet to name a successor.

Founded in 1986, Burkle’s Yucaipa Cos. made its name largely by acquiring grocery chains and other food-related businesses, but has a recent history with fashion on both the vendor and retail sides.

Designer label Zac Posen and jewelers Garrard and Stephen Webster are among the recipients of some of the more than $30 billion in investments the firm boasts of on its Web site. In 2003, Yucaipa acquired a significant stake in Sean Combs’ Sean John label for an estimated $100 million. Burkle took control of Scoop, the New York-based contemporary retailer, in 2006.

Earlier this year, sources told WWD that the Los Angeles-based investment firm entered the lowest bid of the three finalists in the auction for Hartmarx Corp. as the storied Chicago men’s clothing maker emerged from bankruptcy.

Securities and Exchange Commission filings revealed last week that Burkle had more than doubled his stake in bookstore chain Barnes & Noble to 16.8 percent from 8.3 percent at the start of the year.

Burkle hails from Southern California, where he worked as a supermarket bag boy before later staking his fortune on the industry through takeovers of such chains as Ralphs and Dominick’s. The 56-year-old is a high-profile Democratic fund-raiser and counts former President Bill Clinton among his friends.

An investment in Barneys wouldn’t literally be a first for Burkle. In court records unsealed in 2006, ex-wife Janet Burkle said it was common for her to spend $15,000 at the store in a single visit, press accounts from the time showed.

 

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