The credit market is tight and getting tighter, and that’s making the fight for survival even more difficult for distressed companies.

In recent weeks, it’s become increasingly apparent, both inside and outside the apparel and retail industries, that the ability of companies to emerge from or resist bankruptcy is being adversely affected by the higher costs and tighter availability of credit. Access to money can no longer be depended upon to help companies endure tough business conditions or critical cash shortfalls.

Richard Kestenbaum, a partner at investment banking firm Triangle Capital, said the times when companies were able to get new financing to help postpone the day of reckoning are now over.

“We are finding that over the last several years, we’ve been able to sell companies that were doing well for good multiples. In the last six months, there hasn’t been much of a market for those companies as much as there is for firms doing terribly and which can’t get financing,” the banker said.

He noted that, in the past several years, many of these companies “would have been able to paper over their problems with financing.”

Kestenbaum’s firm recently represented bankrupt Red Envelope’s sale to Provide-Commerce, a Liberty Media subsidiary, for about $16 million.

According to the banker, the Internet gift site had undergone several changes in strategy as well as chief executives, none of which gave lenders confidence about the stability of the company. “The company was looking for financing between $5 million and $20 million, and if they got it, it might have saved the company. But this is a different market now. If this had been back in 2006, they would have been able to get the financing,” he said.

Last week, word surfaced that the once high-flying Steve & Barry’s University Sportswear is up against increasingly difficult odds as it scrambles to raise $30 million in financing. Some financial sources said that even if it does line up the financing, it will face almost prohibitively high interest rates on its loans.

Goody’s Family Clothing Inc., which filed for Chapter 11 bankruptcy court protection in early June, was able to get financing earlier in the year, but was socked with interest rates in the 12 to 14 percent range. It also was able to get a $210 million debtor-in-possession credit facility for use during its tour of bankruptcy, but the interest rate was just as high as the financing package inked months before the bankruptcy filing.

This story first appeared in the June 30, 2008 issue of WWD. Subscribe Today.

One analyst at an institutional investment firm isn’t surprised about the credit market’s ongoing malaise, noting the consumer psyche is helping to prolong the belief of an extended slowdown, which in turn causes lenders to pull back even more.

“The hope at retail for the recovery from the stimulus checks has dissipated. The consumer has spent the rebate checks on food, gas and paying down debt….Sales will get worse before they get better, and you’ll see department stores become more promotional,” the analyst said.

Recent readings of the American public’s mood have done nothing to foster optimism about a turnaround in retail activity.

The Reuters/University of Michigan Surveys of Consumers placed consumer confidence at a 28-year low on Friday. Earlier in the week, the Conference Board’s monthly consumer confidence monitor for June dropped to its lowest level in 16 years amid growing concerns about high prices, falling home values and a tighter job market.

The Conference Board’s monthly Consumer Confidence Index is now at 50.4, down from 58.1 last month. The two key components both fell this month — the Present Situation Index, to 64.5 from 74.2, and, reaching an all-time low, the Expectations Index, to 41 from 47.3.

UBS chief economist Maury Harris said the index, a key measure of consumer economic sentiment, is “now much weaker than the lows during the 2001 and the 1990-1991 recessions. It looks more than low enough to be consistent with the contraction in real consumption.”

The index fell as low as 70.7 during the 2001 contraction and to 55.3 during the 1990-91 slump.

James Schaye, president and ceo of Hudson Capital Partners, a liquidator, is a pessimist, even though the downward trend would be good for his business.

“A pickup in the economy? No, not at all,” he said. “I am very pessimistic, and I think this will last for at least the next nine months. People will get accustomed to high energy prices, but right now there is a genuine downturn in the economy and it’s challenging for consumers because it’s hard to absorb $4 and $5 for a gallon of gas. Even for those with large disposable incomes, when you stand at the pump and watch that dial ringing up $80 and $90 for a tank of gas, it may not be meaningful for the individual’s bottom line, but it is from a psychological viewpoint.”

Bob Carbonell, the chief credit officer at Bernard Sands, a credit-checking firm, commented, “I see factors closely managing risk. I see retailers doing everything possible to pump up liquidity and cut expenses. There is an awful lot riding on back-to-school at many retailers, but if it doesn’t materialize, I can see manufacturers and factors rethinking their holiday commitments.”

So, while banks have been getting nervous and clamping down on lending to manage risk in their portfolios, these days perhaps not even private equity firms are immune to the overall malaise from the shutdown in the credit markets.

So far retailers such as Goody’s, Whitehall Jewelers and Linens-N-Things, all of which were bought by private equity firms within the last two years, have filed for Chapter 11 bankruptcy court protection.

Could more recent buyouts meet the same fate? Perhaps.

In the last several years, money was plentiful, and leveraged buyouts were the rage. Some of those deals might blow up, particularly since the combination of overleveraging and a slowdown in consumer spending aren’t exactly the best of bedfellows.

“The problem is that the economy was expanding when these deals were done, and the projections, the growth ratios used, often don’t take into account a slowdown in the economy,” said Gary Wassner, president of Hilldun Factors. “For the LBO deals, I think many deals won’t pan out now that the consumer is pulling back because there’s no growth in the sales volume to feed the engine and pay down the high debt incurred from the buyout.”

Waxing philosophical on the topic, Triangle’s Kestenbaum noted: “One of the phenomena of life in general is that people always assume the future is the extrapolation of the present, and it never is. Therefore, when business is rising, people assume it will continue to rise. When business is declining, people assume it will continue to decline. That’s when there can be great opportunities for acquisitions.”

Kestenbaum said the early years after an acquisition are often a dangerous time for acquired firms where the deals are highly leveraged.

“That’s when those companies have the highest leverage, and therefore the highest risk,” the banker said. He explained that the business climate is an important factor because a booming economy allows the cash flow to continue, which enables firms to pay down the debt. As the debt is paid down, the investment in turn becomes less risky to the buyer, Kestenbaum said.

Some credit watchers are keeping close tabs on The Talbots Inc., hoping the deal with its majority shareholder, Aeon Co. Ltd. — for a $50 million unsecured subordinated working capital term loan credit facility maturing in January 2012 — goes through to give the women’s specialty chain a much needed financial boost.

Another retailer that is raising some eyebrows because of its losses is Claire’s Stores Inc. The company on June 11 said lower sales and almost $49 million in interest expense left it with a $35.6 million loss in the first quarter. The Pembroke Pines, Fla.-based specialty retailer of jewelry and accessories, which was acquired and taken private by Apollo Management LP and other interests in May 2007, reported red ink compared with net income of $28.8 million in last year’s quarter. Sales decreased 4 percent to $327 million from their year-ago level as comparable-store sales fell 8.4 percent.

Gene Kahn, ceo, noted that the company began the year with expectations of same-store sales growth, but that eroding sales trends led to a review of expenses. He estimated that the company can trim $15 million from its original cost projections and realize $40 million in annualized savings beginning next year.

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