A medium-sized US homewares retailer could embarrass some of the bigger names in US finance, especially the private equity business, by going bust this week.
If it happens, the bankruptcy of Linens n’ Things would be one of the biggest failures from the long list of private equity buyouts we have seen in the past six years.
And if Linens ‘n Things does file for Chapter 11 bankruptcy court protection, it will be a major blow to the mighty General Electric, whose finance arm is already under pressure from poor profits and big write-offs, as we saw on Friday.
And, if Linens n’ Things goes into chapter 11, it will join several small airlines which have failed in recent weeks in the US: in fact four of five airlines have run into turbulence, with the latest, Frontier, filing for Chapter 11 protection late last week.
Linens’ negotiations with creditors continued over the weekend and if they fail, it is expected to file for bankruptcy under Chapter 11 on Tuesday, US time.
It could be a sign of more failures and bankruptcy work outs to come as the US recession intensifies and hits more and more non-financial groups. Up till now most of the high profile failures have been in finance, mortgages and related businesses with over 200 companies going out of business since early 2007.
The problems Linens has struck showed up in the March retail sales figures which were weak. A small increase of 0.2%, 0.1% after car and petrol sales were excluded. Some analysts saw that as ‘good news’ others recognised it for what it was; bad news for retailers generally as US consumers continue to cut spending.
If Linens does go into Chapter 11, it will join several other US chains in bankruptcy: jeweller Fortunoff, specialty retailer Sharper Image and catalogue and Internet retailer Lillian Vernon.
These figures and the general slowdown raise questions about other retailers taken private in buyouts in recent years. They include Toys “R” Us and upmarket chain, Neiman Marcus.
The problems at Linens, comes at an awkward time for the buyout firm, Apollo Global Management, which has filed a prospectus to list on US stock exchanges, and is negotiating (with a couple of other firms) to buy $US12 billion of leveraged debt from Citigroup.
That debt includes some of Apollo’s and the deal, which should happen this week, will help relieve pressure on Citigroup.
Some of Apollo’s other buyouts are said to be finding it tough, including real estate group, Realogy, the parent of the real estate companies Coldwell Banker and Century 21, and another chain, Claire’s Stores, a jewellery, cosmetic and accessories chain catering for young women.
Linens n’ Things was bought by Apollo for $US1.3 billion at the height of the private buyout boom in 2006. It has sales of around $US2.7 billion, has upwards of 500 stores in 47 states and posted losses last year of some $US242 million, as the housing slump depend.
That slump continues and the US economy as a whole is in a recession-like state, with retail sales at leading chains worsening.
A major competitor, Bed Bath & Beyond last week revealed a 16% fall in quarterly profit and forecast first-quarter earnings below market expectations. That result and the slump in housing and retail sales led Moody’s rating agency to put Linens on credit watch negative for a possible downgrade, which would cut the value of the company.
That in turn is yet another headache for General Electric. Its Commercial Finance arm has a $US700 million in a revolving credit facility with Linens and any move into bankruptcy would lower the value of that facility and possibly force a write-down.
The commercial finance business of GE reported lower earnings in GE’s shock first quarter profit fall and lowered 2008 forecast on Friday.
Problems at Linen’s n’ things will make it harder for the Commercial Finance arm to improve its earnings this quarter.
A better sign of the problems is the value of Linens ‘n Things floating rate notes due in 2014. Reuters reported that they traded between just 35c and 40c on the dollar on Friday. That’s less than half face value, a pointer to an implosion at the company and big losses not only for GE, but for Apollo and its investors in this deal.
GE’s money businesses did badly in the quarter. While Commercial Finance reported a $US270 million drop in earnings, the parent was forced to write down the value of loans and Chinese securities it holds.
The company said the bail out of Bear Stearns on March 14, a day after it repeated its 10% profit rise forecast for 2008, had created "a different world” in financial markets. GE is trying to sell its US credit card and Japanese consumer finance divisions, without success.
GE said on Friday that the problems in the financial markets were the big reason behind the weakness.
That’s not going to change soon.
