As Barneys races to find a buyer, vendors fear getting left behind

Bankrupt retailer Barneys New York got some breathing room Thursday, securing an extended deadline to find a buyer. The retailer has an offer in the works for a going-concern deal for five of its stores including ones in Chelsea and on Madison Avenue, according to a source.

CEO Daniella Vitale has been under intense pressure as the Barneys’ debtor-in-possession lenders, Brigade Capital Management and B. Riley Financial, moved up the timeline for offers to Oct. 3 from Oct. 24. As often happens in bankruptcy cases when deals are in the works, the lenders granted an extension, this time to Oct. 11.

But failing to meet that or other milestones in the DIP financing deal would put Barneys in default on its loan terms, giving the lenders the right to push for a remedy, including liquidation.

The lenders tightened the timeline in part to put pressure on potential buyers, sources said.

One source told Crain’s that a group led by Sam Ben-Avraham is the lead bidder and that Authentic Brands Group, which has long been said to be interested in Barneys, remains in the mix. Ben-Avraham, a fashion trade show executive, founded clothing retailer Atrium.

“We are really hopeful, and frankly confident, that we can get something done quickly,” said Joshua Sussberg, a partner in the restructuring group at Kirkland & Ellis, which represents Barneys in the bankruptcy. “Lots of parties are taking a look at this asset.”

Sussberg declined to comment on specific bidders. But when he was asked whether “something” includes a going-concern sale, he said yes. 

At press time, no deal had been finalized. Any offers in the works could change or be derailed before Oct. 11.

The offer by Ben-Avraham’s group was said to be about $220 million, including cash, debt relief and possibly rent relief. 
The group is seeking five of Barneys’ remaining seven stores, including the flagship on Madison Avenue and locations in Chelsea, Boston, Beverly Hills and San Francisco.

The Madison Avenue store might be reduced by three floors, and the rent slashed at that location and in Beverly Hills.
A massive rent increase this year on the Madison Avenue store, to about $30 million annually, helped push Barneys into bankruptcy. 

“The committee is very encouraged that the letter-of-interest date has been further extended to Oct. 11 and is cautiously optimistic that Barneys will receive one or more firm offers by that date for a meaningful going-concern bid,” said Bradford Sandler, partner and co-chairman of the committee practice at Pachulski Stang Zielh & Jones, who is representing the creditors’ committee in the Barneys bankruptcy. 

Unsecured creditors

Behind the scenes, hundreds of suppliers are grappling with the fallout of the retailer’s bankruptcy. Barneys filed for Chapter 11 protection Aug. 6, listing $100 million in unsecured trade debt. That figure has since ballooned to more than $135 million, likely because of claims associated with rejected contracts.

Two Tone Studios is among the hundreds of vendors in Barneys’ pool of creditors. Lisa Zerkowitz and Boyd Sugiki are the husband-and-wife team behind the small business. They create hand-blown glassware that’s been sold in the Morgan Library & Museum and featured in O, The Oprah Magazine. When a Barneys buyer placed an order in February for $14,835 worth of drinking glasses and pitchers, Zerkowitz saw an opportunity for her Seattle-based company, which has annual revenues of less than $500,000. 

The couple typically asks for half the money up front for orders greater than $3,000. Many of their colleagues had sold to Barneys, however, and Zerkowitz was keen to see Two Tone’s products among the luxury brands in Barneys’ Madison Avenue store and on the retailer’s website. 

“We did it on good faith,” she said. “We were excited to get the large order and be in Barneys.” 

Two Tone’s spiral glass tumblers and pitchers are available for sale on the Barneys website, retailing for $65 and up.

Zerkowitz has filed a claim in the case but, as an unsecured creditor, she fears her company never will get paid. 

Unsecured creditors, whose debts are repaid only after secured and administrative claims, are expected to recover, at best, a few pennies on the dollar if Barneys achieves a going-concern sale.

When Payless Shoesource emerged from its first Chapter 11 case in 2017, unsecured creditors recovered about 20 cents on the dollar, a high watermark among recent retail bankruptcy cases. (Payless filed for bankruptcy again and shut down this year.) 

“If a deal is finalized there will be a new owner, and to the extent any money is available in the bid, then the unsecured creditors will get typically pennies on the dollar,” said Jeff Trexler, associate director of the Fashion Law Institute, who represents some Barneys vendors.

Options for unsecured creditors to jockey for a better position are limited, but lawyers with expertise in retail bankruptcies said there are steps vendors can take both before a bankruptcy and after a case has been filed to protect themselves, and potentially move up a rung on the ladder. 

As in any Chapter 11 reorganization, the threat of conversion to liquidation is always present. Vendors don’t want to see that happen, as it would mean in-season luxury merchandise being unloaded at fire-sale prices. 

Vendors also worry about Barneys’ ability, per bankruptcy-code rules, to claw back payments it made for merchandise within 90 days of filing for bankruptcy. Barneys made roughly $86 million in payments during that period.

In some bankruptcy cases in which vendors don’t receive cash disbursements for claims, they do get waivers for those so-called preference claims. 

“It’s a difficult pill to swallow for a trade vendor who has an unpaid balance and then may have to repay money that is clawed back,” said Marc Hamroff, chairman of the financial services practice at Moritt, Hock & Hamroff.

“Just because a preference claim was made,” Hamroff added, “that doesn’t mean there aren’t significant defenses.”
Then there’s the issue of how to do business with a retailer after a bankruptcy filing. In a letter posted online, Barneys’ CEO recently boasted of bringing in 4,000 new arrivals from stalwart Barneys brands. An industry source told Crain’s that vendors have worked out various arrangements since the filing to minimize their risk, in some cases negotiating the right to take back their merchandise if Barneys ends up liquidating.

Well-established reputation

Even as reports surfaced prior to the filing that the chain was struggling, vendors continued to bet big on Barneys because of its storied history and its status as one of the few remaining brick-and-mortar outposts for up-and-coming high-end brands. 

“For products of the type Barneys showcases, it’s important for consumers to be able to interact with these exceptional fashion items,” said Douglas Hand, partner at the law firm HBA, who represents multiple vendors that sell to Barneys. 

Zerkowitz and Sugiki spent seven weeks creating the glassware for Barneys, packing it themselves in 27 boxes on two pallets. According to purchase orders reviewed by Crain’s, the merchandise shipped to Barneys on April 29, with payment terms of net 30 days on the total of $14,835 Barneys owed. 

Zerkowitz did not receive payment as of July, so she checked in with her buyer at Barneys.

By that time, reports were surfacing that management was racing to find a buyer to avoid bankruptcy.

Zerkowitz said she asked for the return of unsold merchandise Aug. 2 and was told to expect a list of inventory the stores had on hand. On Aug. 5 Zerkowitz was working out the details of the return of items that were taken off the floor. Barneys filed for Chapter 11 bankruptcy protection the next day.

Once Barneys filed, the Two Tone glassware—along with millions of dollars of other luxury products—became part of the bankruptcy estate. Zerkowitz’s merchandise cannot be returned to her. 

“Fifteen thousand dollars is a lot for us,” she said. “I just assume it’s a loss.”

Extended hours

At press time, trade creditors had until Oct. 17 to file claims. If their claim qualifies, vendors can gain leverage by filing an administrative claim under the bankruptcy code, experts said.

That is a carve-out for goods received 20 days prior to a company’s bankruptcy filing. 

A vendor with an administrative claim gains negotiating power, because a Chapter 11 plan cannot be confirmed without providing full payment to all administrative claims in real dollars unless the holders of those claims agree to accept something less.

“These are very valuable, given their priority, and claimants will be maneuvering to qualify for this status,” said Lindsey Simon, assistant professor at the University of Georgia School of Law, who has expertise in bankruptcy and commercial law. 

Barneys entered bankruptcy without a “stalking horse” bidder, which would have established a baseline valuation for a deal. At a court hearing this month, Chief Restructuring Officer Mohsin Meghji estimated the floor value of a deal at roughly $220 million, including about $195 million in secured debt and $25 million in administrative and priority claims, according to WWD, which reported that Barneys lost $16.3 million in the three-plus weeks after filing for bankruptcy. 

Vitale, the CEO, and Chief Financial Officer Sandro Risi have received court approval to split an incentive bonus of $1 million or more if they assist in completing a sale that meets certain parameters. From August 2018 to July 2019, Vitale raked in a gross salary of around $48,000 every two weeks, according to court papers. She reportedly has been trying to line up a buyer for months.

 “I don’t know if there will be a buyer for Barneys, or what the future holds,” Zerkowitz said. “It feels really ugly that they are doing business as usual while people are just out” large sums of money.
“Big people, small people—everybody is affected,” she said. 

SOURCE: Section Page News – Crain’s New York Business – Read entire story here.