Turnarounds and distressed situations are the strange animal in the mergers and acquisitions world.

This story first appeared in the March 13, 2012 issue of WWD. Subscribe Today.

Not all troubled firms are in bankruptcy proceedings, although many are close to it. And not all buyers necessarily have the patience or the expertise required to right-size what many others consider a has-been operation.

For many troubled firms, transactions can get completed, but often remain under the radar. In an effort to avoid being under the control of a bankruptcy court, the firms try to work out an arrangement on their own.

“These are the informal settlements where parties go directly to creditors after deals are struck. It saves everyone time, court costs and attorney fees,” said Allan Ellinger, managing director at Marketing Management Group.

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Many firms in the last few years have reduced operating expenses, and have relied on margins to sustain them. Now that margins are under pressure due to cost inflation, Ellinger foresees that the apparel sector might see more companies crossing over into distress mode as the year progresses.

Yak Pak, the fashionable backpack brand bought by Accessory Network Group last year, is the subject of an auction by its secured creditor, Wells Fargo Trade Capital Services. Wells Fargo withdrew financing from Yak Pak’s parent and is believed to have taken the Yak Pak trademark as partial settlement for debt owed by Accessory Network, which continues to search for financing.

Others in Chapter 11 bankruptcy proceedings and seeking buyers are direct seller of couture-level apparel The Connaught Group, which has an auction set for March 24, and United Retail Group’s plus-size retail chain Avenue. While Avenue has a so-called stalking horse bid from Versa Capital Management, that is subject to better offers.

On the turnaround-distressed side not involving a bankruptcy court, misses’ chain The Talbots Inc. is in the middle of a sales process and about to enter a second round of bidding. High-end luxury specialty retailer Barneys New York has hired bankruptcy counsel to help it restructure its debt, but the hiring has fueled a wide range of market speculation, from closure of stores to finding a buyer to even another bankruptcy filing.

In overseas activity, Paris-based fashion house Jean-Charles de Castelbajac was acquired by South Korean sportswear designer and retailer EXR Korea Co. in the fall, following the brand’s entry into receivership, the equivalent of a Chapter 11 bankruptcy filing.

A French court in January approved the purchase of French lingerie brand Lejaby by a consortium led by Alain Prost, who once held posts at lingerie firms Chantelle and La Perla. Lejaby entered receivership in October.

The U.K. in particular has seen its share of fashion retailers entering administration, the equivalent of a bankruptcy filing. Men’s wear retailer D2, registered under the name A&J Menswear (Retail) Ltd., went into administration in December. Mass fashion retailer Peacock Group entered in January, and the Peacock nameplate was acquired by the Edinburgh Woollen Mill, a Scottish chain, last month.

Peacock’s other nameplate that was under its umbrella, Bonmarché, was acquired by Sun European Partners, the European adviser of U.S. private equity firm Sun Capital Partners.

Sun European, whose specialty is turnarounds and special situations, has been particularly active in the European retail scene. It also counts Scotch & Soda, V&D, Strauss Innovation, Jacques Vert and Irisa Group as part of its portfolio of firms. Irisa, formerly Alexon Group, was a prepackaged deal as the firm was nearing administration.

Paul Daccus, managing director at Sun European, said his firm prefers investments in companies that are niche players, with brand-loyal consumers. That’s one reason it acquired Alexon, an occasion wear retailer targeting the mature women’s market, and Jacques Vert, which has complementary brands focusing on the same consumer.

“These are identical businesses in an underserved niche that is part of a market where there is still disposable income,” Daccus said.

He explained that the Jacques Vert and Alexon businesses were sourcing in the Far East through intermediaries prior to his firm’s purchase of the operations. These days the businesses work with an internal sourcing network that Sun set up six years ago, an operation that all apparel firms under the Sun umbrella, whether Stateside or overseas, have access to if they choose.

Daccus noted that financing in Europe can be difficult to obtain, depending on territory. Real estate and retail are sectors where traditional bank financing can be hard to get as banks have become more selective.

“There are pockets in funding, such as asset-based lending,” he said. Bonmarché, which has good cash flow, is one example where ABL funding was used.

William Susman, founder of Threadstone Partners in the U.S., said, “For turnaround situations, financing is going to be heavily dependent on assets, particularly receivables and inventory. The market will provide second lien financing for trademarks and other intangible assets.”

He added that retailers with decent cash flow can look to ABL financing, but branded apparel firms where cash flow is absent will find turnaround financing difficult. “In the latter case, the only financing available is equity,” Susman said.

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