Two Campeau Units Get Default Notices

Campeau Corp.’s two big U.S. department store subsidiaries received default notices from their lead banker, a move that may edge the units, Allied Stores Corp. and Federated Department Stores, closer to bankruptcy court.

Campeau has said it is trying to renegotiate its debt with junk bond holders and other creditors in an effort to avoid bankruptcy proceedings for the units. But Campeau on Friday disclosed that the effort suffered a setback when Citibank, its lead bank, gave formal notice that the units would be in technical default within 10 days on loan agreements covering up to $2.34 billion.

Carol Sanger, a Campeau spokeswoman, confirmed that the default notices increase the risk that the banks could demand accelerated repayment of the loans. She said that in turn could greatly increase chances that the two units would have to file for protection from creditors under Chapter 11 of federal bankruptcy law.

The two subsidiaries own such well-known department store chains as Bloomingdale’s, Abraham & Straus and Jordan Marsh. Campeau is reeling under a total $10.9 billion in long-term debt, mostly from its takeovers of Allied in 1986 and Federated in 1988.

In separate filings with the Securities and Exchange Commission earlier this month, Allied and Federated said they might be forced to seek bankruptcy court protection while Campeau reorganized its finances. Meanwhile, in an effort to raise cash, Campeau has been taking bids for its 17-store Bloomingdale’s chain.

An early bankruptcy filing almost certainly would wreck immediate chances of selling Bloomingdale’s, since any sale would have to be reviewed by creditors’ committees and approved by a bankruptcy judge.

The technical default relates to Campeau’s failure to supply the banks with certain financial reports as required under the bank credit agreement. In written statements, Allied and Federated on Friday denied that they had violated the terms of the credit agreement.

But in a telephone interview, Campeau spokeswoman Sanger confirmed that Allied and Federated had failed to fulfill a requirement to supply a certificate to the banks stating that the subsidiaries are solvent. Sanger said they had failed to do so because “subjective judgments” about the value of assets and other matters made it unclear whether the units were meeting all of the financial requirements spelled out in the credit agreements.

Industry experts and individuals close to Campeau’s negotiations with creditors said the notice of technical default may well be an indication that Allied and Federated are in trouble not only on financial reporting but on more substantive matters such as the minimum amount of working capital they are required to have on hand under the credit agreement.

Howard Davidowitz, chairman of Davidowitz & Associates, a national retail financial consulting firm, said, “Campeau failed to provide certain information on a timely basis to the lenders.” He added, “The banks probably didn’t get the information, and they’re suspicious of what’s going on.”

It was disclosed separately that Rothschild Inc. is representing holders of about half of Federated’s $1.8 billion in junk bonds in negotiations with Campeau and that the group of institutional investors wants to play a role in Campeau’s financial restructuring.

In a telephone interview, Wilbur Ross, a senior managing director at Rothschild, played down the significance of the default notices. “I’ve never heard of anybody accelerating (repayment of) a bank loan over a reporting requirement,” he said. But Ross acknowledged that “there may be something more significant behind it.”

He said that negotiations between Campeau and holders of Federated’s and Allied’s junk bonds were in an early stage. He said it probably would be weeks before any agreement could be ironed out.

Campeau reportedly has about $2 billion of debt due in the next two months, of which $1.3 billion is to bank lenders.

Trading in Campeau’s stock on the Toronto Stock Exchange and the over-the-counter market was halted Friday morning pending the disclosure of the default notices. The disclosure was made after the markets closed, so trading didn’t resume. Campeau’s stock was last quoted at $3.625, up $0.25 in over-the-counter trading.

It is believed that Campeau delayed making the announcement while it held discussions with lenders.

Trading in Allied and Federated junk bonds wasn’t halted, however.