Running Out of Time
● The company is said to be pounding the pavement for debtor-in-possession financing.
Barneys scrambles for funds to make ends meet.
The delicate dance between Barneys
New York and its bankers has become a sprint for cover.
Barneys secured additional funding from its lead lender, Wells Fargo, this spring to help cover rent at the Madison Avenue flagship, which jumped dramatically to
$30 million from $16 million. But when the tony retailer still didn’t have enough to make ends meet and returned to the bank recently to ask for the money needed to go through the bankruptcy process, Wells Fargo is said to have passed.
“Barneys’ ask was just way to high and it was ridiculous how much they needed,” said one financial source, referring to its debtor-in-possession financing proposal. Neither Barneys nor Wells Fargo responded to WWD queries Thursday.
The signs of strain at Barneys have been growing. Trade lenders have stopped signing off on shipments to the company and brands are extremely wary that unpaid bills will get caught up in bankruptcy and that they’ll ultimately get much less than what they’re owed.
Since apparently being turned down by Wells Fargo, the retailer has moved on and is speaking to debt specialists under the cover of non-disclosure agreements in hopes of cobbling together a DIP package, said another source. The financing, which could come from a mix of existing and new lenders, would help the company keep the lights on and pay for new shipments from vendors as it works its way through the bankruptcy process.
“They’re out knocking on doors, trying to make sure the people who have the big buckets of money are willing to support them,” the source. “Once they start down this path, the clock starts ticking really fast because the vendors are obviously getting very anxious.”
Liquidation has been seen as a remote possibility, but it appears the company is not ready to throw in the towel and is trying to restructure its debt with the help of a bankruptcy court. There is also a chance the company, now scrambling for some solution, could find another way to keep itself afloat — although the fix would have to be novel and not too obvious.
Barneys, which is owned by investor Richard Perry, has been trying to find a buyer, but none seem to be forthcoming. It’s also not clear exactly what a buyer would do with the business, which does not have the financial cushion of real estate to fall back on or monetize.
Barneys sells forward-leaning designer fashions to the cool part of the upper crust — a positioning that works better in its New York and Beverly Hills stores than throughout the rest of the 24-door chain, including outlets.
“Part of their struggle is going to be that they’ve become progressively niche, more narrow,” the source said. “It’s worth something. It’s an interesting brand, but as a platform, how meaningful is it?”
That is a question for all retailers, which have had to move past their own four walls to embrace a broader mandate, serving up fashion ideas when and how the consumer wants them.
The challenge is that it’s not just retailers that have been racing to solve the problem. Brands also are approaching consumers head on, courting them with their own stores, web sites and through a constellation of social media outlets. And newer digital players — from Yoox Net-a-porter and Matchesfashion to Farfetch — have taken share in the market even if they still haven’t figured out how to make money.
If Barneys does slip into insolvency again — after a 1996 bankruptcy — the process will unveil just how the retailer has been struggling and could dramatically reconfigure the company.
Bankruptcies can take one of several paths — in a best-case scenario, the company would work out arrangements in advance to pay creditors and develop a restructuring plan, what’s known as a prepackaged bankruptcy.
But retailers on the verge of insolvency are seldom in a position to pay off all creditors including trade vendors, and end up negotiating with just key players, such as landlords, before filing for bankruptcy. That way, they can work out a plan the court could approve more quickly and negotiate other concessions during the process.
If no plan is in place, the company would go into a free-fall bankruptcy.
Barneys’ approach, as a boutique retailer, could depend a great deal on its leases with landlords, restructuring attorneys said.
“Barneys isn’t your traditional retailer that would be filing for bankruptcy when they have like 300 stores and like 50 or 60 that are not doing well,” said Hamid Rafatjoo, partner at Raines Feldman LLP. “Most retailers have low sales volume and liability with lots of leases. But Barneys is mostly stand-alone flagship locations, and it’s the increase in rent that seems to have created a liquidity crunch for them.”
If Barneys files for Chapter 11, its initial filings might offer a sense for its preparedness and the direction it’s headed. Filings for motions to hire lease consultants, for instance, may point to efforts to renegotiate or even potentially market leases to other buyers.
“Before a bankruptcy, everyone has their lawyers and financial advisers and they’re running their models to see what is most viable for the business,” said Rafatjoo of Raines Feldman.
Bankruptcy proceedings give both debtors and landlords leverage. Although landlords are considered unsecured creditors, low in the hierarchy of who gets their debt paid first, special provisions of the bankruptcy code protect their contract rights.
For instance, the debtor has about seven months after filing for Chapter 11 to either walk away from their leases or negotiate lower rents with their landlords. Until then, they must pay their rent in full. But companies in bankruptcy have leverage because landlords could be left with practically nothing if debtors chose to drop their leases — any damages from breaking the lease would be treated as a general unsecured claim in the bankruptcy, for which landlords can expect to recoup little more than pennies on the dollar.
Presumably, that doesn’t worry the Ashkenazy Acquisition Corp., which owns the Barneys’ flagships on Madison Avenue and in Beverly Hills and raised rents at both locations. But a bankruptcy filing could help the retailer with its other leases.
“The ability, under the bankruptcy code, to reject leases provides debtors with significant leverage to renegotiate lease terms,” said Ian Peck, the chair of Haynes and Boone LLP’s restructuring practice group. “And debtors use this leverage to bring store costs in line with revenues at its locations.”
Retailers can use a bankruptcy to renegotiate most lease terms, like rent concessions, past due rents, and floor space.
Despite its troubles, Barneys has been on a mini-expansion run. Over the past two years, it has signed leases for two new stores, at American Dream, the entertainment and retail complex opening in the fall, and at Bal Harbour Shops in Miami Beach.
Don Ghermezian, president of American Dream, on Thursday told WWD, “American Dream has a fantastic relationship with Barneys and I look forward to continuing to work with Daniella [Vitale, Barneys’ ceo] and the team. Barneys New York at American Dream is moving ahead with construction and opening as planned — the store will be a model for the future. Together, we are creating an environment for guests to experience luxury, dining and entertainment in a completely unique way.”
And last week, Matthew Whitman Lazenby, president and ceo of Whitman Family Development LLC, which owns and operates Bal Harbour Shops, said,
“We have a lease with Barneys. I have every reason to expect them to open as contemplated in four years.”
Hope springs eternal at the intersection of retail and real estate.