VULTURE FUNDS OFFER 50 CENTS FOR BARNEYS’ VENDOR CLAIMS
Byline: Jeff Siegel — with contributions from Rich Wilner
NEW YORK — While Isetan Co. Ltd. continued to blast what it says are Barneys’ maneuvers to sidestep millions in rent payments, vendors seeking to sell their claims against the chic retailer on the open market got more bad news Thursday.
They were being offered 50 cents on the dollar, in the rare instance when they found vulture fund investors willing to pony up the cash. Some investors indicated the price could go lower.
“This is a company that had less than $1 million in cash on hand two weeks after Christmas,” said one analyst at a firm that invests in distressed claims and securities. “That is not a good sign.”
An analyst at a second vulture firm said Barneys vendors could possibly be looking at a “Macy’s type of return” if Barneys is not successful in turning the claims of Isetan — its Japanese partner — into equity. Macy’s paid trade creditors 34 cents on the dollar, mostly in paper.
“Although we are quoting 50 cents on the dollar today,” the analyst said, “we are not buying that much because there is a strong likelihood that the claims are not even worth that much.”
In the market, several vendors said their spring merchandise would continue to sit on the loading dock and not be shipped to Barneys until they got cash in advance or other favorable payment terms.
“They owe us more than $150,000, some of it for goods shipped in August,” said one West Coast sportswear executive, who had about $90,000 in spring goods ready to ship in the next 30 days.
“[Barneys] is not the only game in town,” he added. “I also sell to Neiman Marcus and Bergdorf’s. If Barneys doesn’t shape up, I won’t sell them anymore.”
On Thursday, an Isetan attorney charged that Barneys is using its financial adviser and debtor-in-possession lender as pawns in its war with Isetan.
The attorney, David Wiltenburg, of the firm Hughes, Hubbard & Reed, said in an interview that Barneys had constructed its $100 million debtor-in-possession financing facility with Chemical Bank to assure the embattled retailer would not have to pay its full $25 million in annual rent obligations to Isetan.
Wiltenburg said the DIP agreement, based in part on projections compiled by the adviser, The Blackstone Group, has a purposefully low rent cap that will force Barneys to violate the covenant if it were to pay Isetan in full.
“[The Blackstone report] forecasts that Barneys is going to pay its friends and not going to pay Isetan and equipment providers,” said Wiltenburg.
Isetan, which objected strenuously to the DIP deal before Bankruptcy Judge James Garrity approved a $28 million interim deal Wednesday, is in an awkward position, Wiltenburg said.
He explained that if Isetan enforces the rent obligations, Barneys will be forced to violate the financing deal. A violation could cause Chemical to foreclose on the three flagship Barneys properties. Isetan had a priority position on those properties, which are in Beverly Hills, Chicago and on Madison Avenue, but was displaced by Chemical’s super priority standing under the DIP.
On the other hand, if Isetan allows Barneys to stay under the rent cap called for in the DIP deal, it gives Barneys the upper hand in the dispute, Wiltenberg said. Barneys filed for Chapter 11 protection on Jan. 10 amid a bitter argument with Isetan over the structure of its business partnership.
Barneys had asked Isetan to relinquish ownership of the three flagship properties in exchange for an equity stake in the business. Isetan refused. Barneys maintains that the $25 million in annual rent payments made on the three sites was too much and based upon an alleged over-valuation of the properties. Wiltenburg said the covenants in the DIP deal are a back-door attempt to accomplish what Barneys couldn’t do in the boardroom.
Wiltenburg explained that the DIP agreement with Chemical contains covenants that put Barneys in default if rent expense exceeds the projected rent forecasted by The Blackstone Group by more than $10 million.
Barneys did not return phone calls seeking comment.
The Isetan attorney stated that the Blackstone projection “takes out a lot of expenses” Barneys will incur, and makes it a virtual lock that Barneys defaults on the agreement.
Wiltenburg called the DIP agreement, as currently written, a “pretty crude attempt to back Isetan into a corner.” But he predicted that Barneys’ attempt to squeeze Isetan through its DIP deal is “not going to influence the judge” to approve the entire $100 million deal.
During Tuesday’s bankruptcy court hearing, Irvin Rosenthal, senior vice president and chief financial officer at Barneys, under cross-examination from Wiltenburg, was asked why the company had less than $1 million in cash on hand.
Rosenthal said the cash went to pay vendors, rent, payroll and other expenses. However, Isetan claims Barneys missed its January rent payment and many vendors claim they didn’t receive January payments. — Fairchild News Service