Carter Hawley Sets Stage for Chapter 11 Filing : Retail: The parent of the Broadway chain may request protection from creditors within days, sources said. But officials refused to comment.
Carter Hawley Hale Stores, parent of the Broadway-Southern California and the biggest department store company in the West, made preparations Thursday to file for Chapter 11 bankruptcy court protection from creditors, according to sources with ties to the company and in the legal community.
Bankruptcy lawyers hired by Carter Hawley, these sources said, are drafting legal documents on the expectation that they will make a Chapter 11 filing within a matter of days. The company is still pursuing a last-ditch financial rescue outside of bankruptcy, but the prospects for such a deal appear to be slim, one source said.
Carter Hawley refused to comment on these developments, saying that as a matter of policy it does not discuss “rumor and speculation.”
Sources said Stutman, Treister & Glatt, a major Los Angeles bankruptcy law firm, was retained by Carter Hawley.
The disclosure of Carter Hawley’s plans followed days of increasing signs of the Los Angeles-based company’s financial distress. The developments have raised strong concerns among employees, suppliers and other creditors.
Many of the company’s problems date to 1987, when it took on junk bond debt as part of a restructuring to fend off corporate raiders. In its most recent fiscal year, Carter Hawley, beset with interest expenses and weak sales, lost $26 million.
Under a Chapter 11 bankruptcy reorganization, a company is shielded from creditors’ lawsuits while it continues to operate and tries to resolve its financial problems. Payments previously due to creditors would be put on hold, and creditors probably would collect only a fraction of what they are owed.
Workers have expressed worries about their jobs as well as what might happen to the company’s employee savings plan. About 14,000 of Carter Hawley’s 29,000 employees participate in the program, and it holds 45% of the company’s stock. In many circumstances, common stock holds no more than token value after a company files for Chapter 11, although it can recover value later.
In an interview Wednesday, Carter Hawley spokesman Bill Dombrowski said no assumption should be made about what would happen to the value of employees’ stock. At the same time, he pointed out that senior executives own a large share of the stock in the employee savings plan and that they would feel the impact of any collapse in the shares.
Top executives own another 15% of Carter Hawley’s shares directly, outside of the employee savings plan. All told, executives and other employees own 60% of the company’s stock.
“The people who might be criticized are also the people who feel the effects,” Dombrowski said. “They would feel it more than anybody.”
Early Thursday, the New York Stock Exchange took action to signal its concerns about Carter Hawley’s ability to make a $22-million interest payment due next Friday on the company’s $350 million in junk bonds.
The exchange halted trading in the bonds before the market opened, it said, while it “sought confirmation of the company’s ability to meet pending interest payments on those issues.” When Carter Hawley declined to respond, the exchange said, it ordered the bonds to resume trading “flat”--meaning new buyers of the bonds would get no interest from the securities.
Carter Hawley’s junk bonds, after plunging for three days, recovered slightly on Thursday. Its bonds maturing in 1996, which normally pay 12.25% interest, rose $36.25, to close at $195 per $1,000 of face value. Carter Hawley’s 12.5% bonds due in 2002 rose $40, to close at $170.
The company’s stock, which rested at its all-time low on Wednesday, climbed 62.5 cents to $2.50. The rise in the bonds and stock apparently reflected hope among some investors that Carter Hawley will recover from its current cash squeeze.
Carter Hawley’s difficulties follow a flurry of actions by the company in recent months to shore up its finances. The company sold its Richmond, Va.-based Thalhimers division in December to May Department Stores for $317 million, a move that reduced Carter Hawley’s overall debt to $1.3 billion.
The company also has cut about 1,000 jobs during the past four months. In addition, Carter Hawley made a number of high-level executive changes in recent weeks, including the promotion of H. Michael Hecht to president, the company’s No. 2 executive behind Chairman Philip M. Hawley. Hecht had been chairman of the Broadway-Southern California, which is Carter Hawley’s top division.
But a key financial plan fell apart late Tuesday, when Carter Hawley announced the termination of a deal to sell its credit card business to GE Capital Corp. When the deal initially was announced last month, Carter Hawley said it would bring the retailer about $50 million in fresh financing while removing $600 million in debt from its balance sheet.
The failure of that deal coincided with another financial setback--the collapse of Carter Hawley’s tentative agreement to secure $100 million in working capital from a bank group led by Bank of America. After both deals fell through, Carter Hawley took pains to suggest that it, not GE Capital or Bank of America, decided to terminate the agreements.
But analysts have speculated that one of the underlying reasons for the collapse of the loan deal was Carter Hawley’s financial problems. The firm has had several years of poor earnings and the past Christmas season was weak. The company’s crucial second quarter, which includes the holiday shopping season, ended Saturday and earnings have not yet been disclosed.
On Thursday, Carter Hawley reported that its sales at stores open more than one year were off 3.7% in January and were down 2.2% for the 52-week period ended Feb. 2.
Along with the Broadway-Southern California, Carter Hawley owns the Bay Area’s Emporium chain, the Sacramento area’s Weinstocks stores and Phoenix-based Broadway-Southwest. In all, it has 88 stores.
