BOMBSHELL BY BARNEYS
Byline: Sidney Rutberg, Rich Wilner, Jeff Siegel, New York, and Koji Hirano, Tokyo
Files for Chapter 11
NEW YORK — Barneys Inc. has filed for Chapter 11 here in what executives insist is a legal manuever to resolve a conflict with Isetan of America, its landlord and business partner.
Faced with the possibility that Isetan, landlord of its three flagship stores, would begin foreclosure proceedings Thursday morning, Barneys filed for Chapter 11 late Wednesday.
According to Isetan, Barneys had missed a total of roughly $4 million in January rent payments on its New York, Beverly Hills and Chicago stores and had been given a grace period to pay the rent.
That grace period expired Wednesday at midnight.
Barneys, on the receiving end of strong criticism in recent years for slow payment practices, has periodically been confronted with rumors of serious cash flow problems, poor operations and too-rapid expansion in a difficult market.
But Barneys executives assert that its business is sound. The company has secured $100 million debtor-in-possession financing with Chemical Bank, and neither store closings nor layoffs are planned, according to Charles W. Bunstine, president and chief operating officer. In an interview Thursday, Bunstine pointed out, however, that the retailer will seek to renegotiate certain leases, as a result of the Chapter 11.
At the heart of the filing is a dispute between Barneys and Isetan over the structure of a seven-year partnership. Isetan, technically a partner of the Pressman family, owners of Barneys, played a major role in the expansion of the retailer, having bankrolled the construction of the three flagships, to the tune of $353 million. Other investments, believed to cover various operating expenses, have put total Isetan investment in Barneys ventures at $587 million to date.
In this current conflict, Barneys contends that Isetan has placed an unrealistically high value on the real estate and that Isetan, which underwent a management upheaval over a year ago, defaulted on an agreement to nurture Barneys’ international business at a more rapid rate.
Barneys, which filed 21 separate petitions in Chapter 11, listed liabilities of $361.4 million, of which $349.3 million were unsecured. Assets were listed at $385.1 million. About 85 percent of the total liabilities are owed to banks and insurance companies, Bunstine said.
According to the filing, the largest unsecured creditors are Chemical Bank, owed $71.1 million; Republic National Bank, $25.1 million; Allstate Life Insurance Co., Northbrook, Ill., $25.1 million, and Natwest Bank N.A., $15.9 million.
The largest trade creditors are Hugo Boss Fashions Inc., Brooklyn, Ohio, $2.4 million; Donna Karan Menswear, Philadelphia, $1.95 million; Marzotto, $1.13 million, and Hickey Freeman, Chicago, $1 million.
Other trade creditors owed money by Barneys through its affiliate, Barneys America, include Giorgio Armani Menswear, $252,255; Hermes Inc., $66,114, and Faliero, Sarti & Figli, $48,300
Barneys said in a statement that it sought court-protected reorganization in order to restructure its seven-year-old joint partnership agreement with Isetan’s parent, Isetan Co. Ltd.
At the same time, Barneys said that it planned to pay creditors 100 cents on the dollar.
Bunstine said that while creditors will be offered 100 percent, payment will not be made until its differences with Isetan are settled.
Asked how long it would take to reach an agreement, Bunstine said, “We can probably clean it up in two or three months.”
A key sticking point of the negotiations is the valuation of real estate occupied by Barneys. Noting that real estate values have declined, Bunstine said, the value Isetan is putting on the real estate “is about four times the market value.”
Barneys sought protection in a less than conventional way — suggesting that talks to reach a settlement may have gone down to the wire — through an emergency filing shortly before 11 p.m. at the home of the chief clerk of the bankruptcy court.
In another tactic, Barneys also said it would file suit against Isetan to recoup more than $50 million “withdrawn unfairly” from the company. Court papers on the suit were not available.
Barneys and Isetan have been in negotiations to restructure the global agreement for about a year.
During that time, Barneys had asked Isetan to sign over to Barneys America the leases on the three stores — as well as the chain’s offices — in exchange for an equity interest in the retailer, said Yasuo Okamoto of Hughes, Hubbard & Reed, counsel to Isetan of America, in a telephone interview Thursday.
Isetan didn’t bite. “We kept looking for the solution over negotiations with Barneys, but it didn’t work,” Isetan said in its statement.
Okamoto said Barneys had mentioned a possible Chapter 11 filing before and that he had interpreted the statement as a negotiating stance. He said Isetan probably wouldn’t have started foreclosure proceedings Thursday morning.
“We could have if we wanted to be nasty, but they are our primary tenant and have been good tenants,” he said.
Okamoto said he had not yet seen the filing or the lawsuit so he could not comment on the alleged $50 million payment in question.
However, he said, Isetan of America is not an equity partner in Barneys or Barneys America, and the only payments Isetan receives are for rent — which he estimated at a little more than $20 million annually — and interest on $233 million in emergency loans it made to Barneys.
Bunstine contends that Barneys has been paying $25 million a year as Isetan’s return on its real estate investment.
In its statement, Barneys said it was forced to make the filing to protect its own best interests.
Isetan said the disagreement with Barneys began in March 1995 when Barneys stopped making interest payments on a bulk of the $233 million in loans.
It was then, too, that Barneys first asked Isetan to swap its U.S. unit’s real estate interest for an equity position in Barneys. Isetan said Barneys wanted the real estate interest so it could use the position to raise capital.
Barneys signed the global retail partnership agreement with Isetan Co. Ltd., Tokyo, a major Japanese retailer, in 1989. Isetan of America, a wholly owned unit of the Tokyo-based Isetan, owns a nearly 100 percent interest in the buildings which house the Barneys New York, Chicago and Beverly Hills stores, plus New York offices.
In addition, Isetan of America owns $12 million in preferred stock in Barneys America.
Under the agreement, Barneys supplied Isetan with strategic and technological planning, including merchandising, marketing, store design, global sourcing and product development.
In return, Isetan supplied the majority of the capital to build the three new stores.
Together, the two companies would contribute jointly to furthering expansion in the U.S., creating Barneys America to develop a chain of smaller stores for regional U.S. markets, developing a designer wholesale business and developing Asian business.
Barneys, in its statement, said the companies “could not reach [an] agreement for the final structuring of their collective interests and investments.”
“We have exhausted all other feasible procedures to bring this partnership equity structure to completion, and we must take this legal step to protect the best interests of Barneys,” the company said in its statement.
Okamoto, counsel to Isetan America, said he was “a little disappointed” Barneys filed Chapter 11 and noted that Isetan would have to start negotiations with the retailer again. “We want them to stay healthy,” he said.
While Isetan said in a release that it plans to continue operating two Barneys units in Japan under a license, Bunstine said that Barneys has declared a default of the licensing agreement. “They have not lived up to the agreement to grow the business,” he said. Currently, according to Bunstine, Barneys Japan is doing a volume of about $100 million a year.
Isetan owns 80 percent of Barneys Japan and the Pressman family owns the other 20 percent.
Meanwhile, despite rumors to the contrary, Barneys’ business in the U.S. has been profitable and growing in recent years, Bunstine said. In the year ended July 30, 1993, Bunstine said, the U.S. operation earned $5.4 million on sales of $175 million. In fiscal 1994, he told WWD, earnings rose to $9.5 million on sales of $291 million.
He said the books on 1995 have not been closed yet, but sales for five months from August through December were up 13.6 percent to $177.6 million from $156.4 million. Same-store sales were up 12 percent in the period, and gross margin improved 18 percent while expenses were down nearly 6 percent.
That rosy picture appears to differ greatly from the news Barneys gave Isetan in November. Isetan said in a statement released in Tokyo Thursday that Barneys had been reporting to them profitable operations until a late November 1995 meeting, when, Isetan said, Barneys reported a “serious red-ink situation.”
Bunstine, however, said he did not know what “red ink” Isetan was referring to, adding that he didn’t want to say anything negative about the Japanese firm.
While Bunstine stressed that Barneys had no intention of closing any of its 20 stores, he said, “We plan to look at some of our leases and renegotiate some that are a little rich.”
Okamoto said he sent Barneys a notice of default on Jan. 5 after Barneys missed the Jan. 1 rental due date. The notice of default, Okamoto said, became effective after five days — on Jan. 11 — giving Isetan the right to foreclose on the mortgages.
Okamoto noted that Barneys had missed a rental payment in September but said the company paid it during the five-day grace period. He said that during a phone conversation Jan. 9 he reminded Mitchell Baker, special counsel to Barneys, that Isetan had the right to initiate foreclosure proceedings Jan. 11, and that Baker intimated Barneys might be forced to file Chapter 11.
Barneys currently has 14 stores and six outlets in 11 states. The stores range from 5,000 square feet to 250,000 square feet, according to court papers. The chain employs 2,000 people.
John Campo, at LeBoeuf, Lamb, Greene & McCrae, counsel to Barneys, could not be reached to comment on the lawsuit the retailer planned to file to recoup the $50 million or on the plan of reorganization Barneys said it planned to file along with the petition.
The company has retained the Blackstone Group as its financial advisers. Bankruptcy Judge James Garrity is handling the case.