CLAIM PRICE DROPPING AS VULTURE FUNDS AWAIT BONA FIDE BARNEYS INFO
Byline: Rich Wilner and David Moin – contributions by Jeff Siegel
NEW YORK — “Vulture fund” operators drove the price of claims against Barneys down sharply Tuesday as the cash strapped retailer scrambled in bankruptcy court to get emergency debtor-in-possession funding approved.
A hearing to approve $20 million of a total $100 million DIP financing package ran late into the evening due to persistent questioning by Barneys’ Japanese partner, Isetan of America, and the court’s requirement that Barneys make a strong case for the funding. The hearing was scheduled to resume today. Meanwhile, millions of dollars of spring goods were left sitting on the shipping docks as the tony retailer continues to wrestle in the mud with Isetan.
In a statement released in Tokyo Tuesday, Isetan said the “financial reports from Barneys, showing consecutive profitable quarters, although duly audited by a U.S. certified public accounting firm, were totally divorced from reality.”
As the sniping continued, the price of Barneys’ claims in the open market plunged to 60 cents on the dollar as vulture funds, which buy up claims and securities in distressed companies, searched for credible financial information on the specialty retailer.
In court, the serious nature of the situation became clear. Irwin Rosenthal, Barneys’ senior vice president and chief financial officer, testified that the company had $937,000 cash on hand.
Rosenthal also said it was important to get the $20 million in interim financing because Barneys normally receives one-third of its spring inventory in the next six weeks. Without the DIP, many vendors refuse to ship, Rosenthal said. He also said the late January warehouse sales in New York and Los Angeles would be affected. “Because we are a fashion company, timely receipt of merchandise is critical to our business,” Rosenthal said. “If we don’t get merchandise in a timely fashion, the customer could go elsewhere and not come back.”
Rosenthal also said Barneys’ two warehouse sales — in New York at the end of January and in Los Angeles a week or so later — “generate very significant sales in a short amount of time” and would be hurt without the financing to receive shipments.
Rosenthal, citing the need for the DIP, said Barneys had “no availability for cash borrowing and no ability to write letters of credit.”
Meanwhile, lacking credible financial information, Wall Street is keeping its investment dollars in its pocket, thereby driving down the asking price of vendor claims. Vulture fund operators said Tuesday that the price quoted for Barneys’ claims fell to 60 cents on the dollar from 70 cents last Friday. Last Thursday, the day the company’s Chapter 11 was announced, claims were quoted at 80 cents.
One analyst at a vulture fund predicted the price would continue to fall into the 50s as the week wore on.
The biggest problem, an analyst at another vulture fund said, was that Barneys and Isetan disagreed sharply on the financial health of the specialty retailer.
“Without a strong faith in the financial strength of Barneys, the investment community is not going to knock down any doors getting to the Barneys’ claims,” the analyst said.
There is very little financial information available about privately held Barneys. With the surprise Chapter 11 filing last week, investors raced to get their hands on some data and immediately found Isetan and Barneys arguing over the veracity of Barneys reported profits.
Barneys claims it had profits of $9.5 million in the year ended July 31, 1995, on sales of $291 million and that it filed Chapter 11 to restructure its working partnership with Isetan.
Barneys also said Isetan is an equity partner and is seeking title from Isetan to its three flagship stores, in Chicago, Beverly Hills and on Madison Avenue.
However, Isetan, the Tokyo-based department store giant that had invested nearly $600 million in Barneys over the last seven years, said it is merely the landlord on the three stores and further charged that Barneys disclosed large annual losses during November 1995 meetings.
That November information ran counter to preceding monthly reports from Barneys that the chain was in the black, Isetan said.
“We believe the filing of the Chapter 11 is without a doubt based on the failure of the management of Barneys and Barneys’ management’s statements [seeking] to transfer the blame to our company…[are] totally regrettable.”
Alluding to the squabble between Barneys and Isetan, one analyst said: “I’m not even sure the price of the claims will rebound once more information is known.”
In other retail Chapter 11s, vendors easily turned their claims into cash. In the Barneys case, it won’t be easy because buyers — lacking credible financial data — are not ready to meet asking prices.
Vendors are anxious to convert their claims into cash, to reinvest the money in their businesses. It could even be a question of survival in some cases. One vendor, for example, said his Barneys claim represents 50 percent of his company’s net worth.
And, if some analysts are correct in predicting a two-year timetable for the Barneys Chapter 11, that could leave many more vendors in a cash crunch.
One analyst dismissed Barneys’ statement that it planned to pay all trade creditors 100 cents on the dollar. “We hear that in every case and I don’t believe it anymore in the Barneys case,” he said.
“Investors are not going to throw money at this case just because Barneys is a sexy retailer,” another analyst said.
Companies such as Federated Department Stores and R.H. Macy & Co. have suffered enormous merchandise shortages in the beginning stages of a bankruptcy, until DIP is arranged and approved by court.
However, Charles Bunstine, president and chief operating officer of Barneys, noted the retailer had arranged the DIP with Chemical Bank in advance of the filing, requiring only that the court approve it after the filing. DIP financing typically gets approved in stages. A second hearing is scheduled for Friday.
The final DIP hearing to approve the full $100 million facility with Chemical Bank is scheduled for Jan. 31.
In a telephone interview Tuesday, Bunstine’s version of the inventory situation differed somewhat from Rosenthal’s.
“I don’t think there is much disruption” in the flow of goods to the stores since last week’s filing, he said.
“We’re working through the technical issues relative to the filing, getting the DIP, making sure letters of credit are in place and that there’s no disruption.”
There were rumors that Bunstine was racing off to Italy Tuesday on a damage control mission, but he denied that was the case. “I’m really working on the quality control side of the private label, the technical standardization of quality and fit,” he said. “This is my normal trip. I am always meeting with them to talk about growing the business.” As far as the bankruptcy, Bunstine said, “I already spoke to everybody.”
However, he did acknowledge that he expects the bankruptcy to come up in his meetings in Europe.
The Pressman family, meanwhile, has taken a very low profile since the filing, and Bunstine acknowledged he was the “lead Barneys person” in dealing with press and vendor inquiries. Bunstine also said it was important that he attend the Giorgio Armani men’s show in Milan this week, which he generally does since Armani is one of Barneys’ top suppliers. In addition, the store is working with Armani on some new fixturing to expand the presentation, he said.
Gene Pressman, Barneys co-ceo and top merchant, had no plans to go to Milan this week, though he has been known to fly in at the last minute to attend the Armani show. Barneys officials said he generally goes to the men’s shows in June, not January.
Bunstine said he will return to New York Thursday, in time for Friday’s court hearing on the DIP.
He said about 80 percent of Barneys’ merchandise comes from Italy, including private label, neckwear, clothing, knitwear and designer goods.
Last week, Barneys’ buyers reportedly were encouraging vendors to ship, telling them Barneys would honor 100 percent of their invoices.
In Italy, Barneys’ men’s buyer Michael Skidmore has been attending shows around Milan over the last few days and was reassuring some key accounts that he would be making buying appointments.
“It’s business as usual,” said Skidmore just before the Gucci show Tuesday night. “We are still seeing the same vendors, buying the usual amounts. There is nothing new. No changes.”
Skidmore is in Milan with Barneys men’s wear team Tom Kalenderian and Edan Goldenberg, while Sarah Kaplan and Peter Rizzo are in Bologna for appointments with sportswear manufacturers and are expected in Milan Wednesday.
“Michael came to our show as he normally does, and he has an appointment to buy the collection,” said Davide Cerrutti, who is responsible for Dolce & Gabbana’s men’s and women’s collections in the U.S. Cerrutti added that he heard the financial director of Dolce Saverio, the company that produces Dolce& Gabbana, has an appointment with Bunstine this week to discuss the financial implications of the Chapter 11 proceedings.
“I really believe that this is a financial matter and that Barneys will meet its obligations and pull through this,” Cerrutti said. “We have never had any problems with payment and we do a significant business with Barneys. “We always work with letters of credit.”
— Fairchild News Service