Creditors of bankrupt Hartmarx Corp. could decide the company’s future this week, but whether that will focus on naming a stalking horse bid and keeping the company intact is now less certain.

This story first appeared in the April 28, 2009 issue of WWD. Subscribe Today.

Sources said a decision, expected last week, was delayed because creditors needed more time to analyze the different bids, as well as weigh the potential return from going directly to a liquidation of the company. Those options are typical in a bankruptcy as creditors try to determine which option provides the best return.

The three official bids — which are all believed to be for the company in its entirety — came from Mistral Equity Partners, Emerisque and Yucaipa Cos. New York-based Mistral put in the highest offer, while Los Angeles-based Yucaipa Cos. put in the lowest. London-based Emerisque, which submitted the middle bid, provided the only offer without any contingencies.

According to sources, Emerisque is also the only bid that supposedly will keep the company intact. The other two are for the entire firm, but delineate what assets are likely to be sold after purchase — a move that helps the bidder pay down the costs of the overall deal.

While trade creditors appear to favor Emerisque because it is viewed as the one that will keep the firm in operation, there is growing concern creditors are eyeing dollars instead of the purpose of a bankruptcy, which is to give the debtor a chance to restructure operations.

In looking at dollars, creditors are said to be analyzing a liquidation option since that might provide an even higher return. In doing so, they are perhaps disregarding the risks in remarketing the properties and awaiting new bids on the components of Hartmarx as assets dwindle in value, as they often do the longer a bankruptcy proceeds.

There was also a concern over the weekend that Wachovia Capital Finance, one of the debtor-in-possession lenders, might elect to pull its support by not extending letters of credit. Vicky Geist, the liaison for Hartmarx at Wachovia, declined comment.

An unsecured trade creditor said Monday that while he hoped the company would be sold as a going concern, he personally wasn’t sure if the “bank is in there for the long haul.”

That raises an interesting point regarding how banks are gaining influence in bankruptcies.

In a recent presentation on bankruptcies and restructuring, Lawrence Gottlieb of Cooley Godward Kronish said the mind-set of the banks is to get paid on their loans.


In retail bankruptcies, banks have a lien on inventory, and they keep a close eye on store closures, figuring that a push toward liquidation earlier in the process ensures the disposition of inventory in a going-out-of-business sale while the retailer still has operation of its stores, the lawyer suggested. That’s because they don’t want to run the risk of seeing retailers lose leases when the retail debtors hit the deadline to assume or reject leases.

Speaking of general liquidation procedure, James Schaye, president and chief executive officer of Hudson Capital Partners, a liquidation firm, said, “Banks aren’t necessarily pushing for a liquidation, but they are watching the assets [of debtors] very carefully. They often give debtors time to find a buyer…but at the end of the day the banks don’t want to get hurt.”

Schaye said typically what happens is the advance rate gets brought down, which means debtors have less access to cash as time goes on. He cited Gottschalks and Fortunoff as retailers that recently liquidated because there wasn’t a buyer or a deal couldn’t get done within a certain time frame and “there was no choice but to start a liquidation.”

Whether the same concerns in a retail bankruptcy will materialize in the case of a vendor debtor such as Hartmarx is unclear, although financial sources said the issues facing the banks are the same: they want to be made whole and repaid on their loans. They also keep a tight watch on the advance rate, leading to the concern on letters of credit.

According to one banker familiar with the Hartmarx bankruptcy, the difference between an outright liquidation and the appointment of a stalking horse bidder intent on liquidating the parts centers on risk.

A buyer takes on the risk of selling the parts it doesn’t want, while creditors who take on that task have no guarantee they’ll get the dollar amount they think the assets are worth.

That’s a consideration that involves the cost of time, such as additional professional fees paid by the debtor’s estate, sources said. It’s a move that is also likely to reduce the return to the unsecured creditors.

Executives at Hartmarx did not return calls for comment Monday.


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