Source: Daily Deal
 
Spiegel Group Inc., the longtime catalog giant and owner of the Eddie Bauer apparel line, sought bankruptcy protection Monday, March 17.
 
The company, which filed for Chapter 11 in U.S. Bankruptcy Court for the Southern District of New York, is looking for a new backer of its private-label credit card as its seeks to restore order to its catalog business.
 
In recent weeks, Spiegel's current private-credit card division, First Consumers National Bank, has suffered from high default rates. The troubled unit is being liquidated as ordered by regulators.
 
Industry observers worry how the move will affect Spiegel's customer base. In the first nine months of 2002, 34% of Spiegel's sales were generated through its private credit cards.
 
"The issue is how will customers react to using a different kind of credit card than they are already used to," said Larry West, head of West Cos., a New York boutique specializing in the retail sector.
 
A Spiegel spokeswoman acknowledged the company has already begun talking to third parties to take over its credit card brand.
 
In the meantime, the Downers Grove, Ill.-based cataloger will operate under a $400 million debtor-in-possession loan agented by Bank of America Corp. Other lenders in the syndicate include FleetBoston Financial Corp. and CIT Group/Business Credit Inc.
 
The DIP loan, expected to have a term of two years, will bear an interest rate of LIBOR plus 300 basis points. The syndicate will also receive a facility fee of $8 million or 2% of the total commitment.
 
During the bankruptcy, Spiegel said its existing line of catalogs and outlet stores, which also includes the Newport News and Spiegel lines, would remain open. No indication was given whether Spiegel would pursue a sale of some of these lines or seek a complete reorganization.
 
The bankruptcy would allow Spiegel to "address its immediate liquidity needs, restructure its debt obligations and other financing arrangements and improve its prospects for future growth and profitability," William C. Kosturos, Spiegel's new interim CEO and chief restructuring officer said in a statement.
 
Spiegel's problems began about a year ago when the company ran afoul of its bank loan covenants. Germany's Otto family, which owns 90% of the company through its Otto Versand GmbH, keep the ailing company afloat with private loans.
 
However, Spiegel's biggest problem was that its First Consumers unit became saddled with a number of loans to customers with high credit risks. This led to an order from the Office of the Comptroller of the Currency in May 2002 to order the bank to liquidate.
 
Other problems then surfaced when the Securities and Exchange Commission filed a civil lawsuit against Spiegel for delaying a February 2002 report from its auditor KPMG LLP that doubted the company's ability to continue as a going concern.
 
Spiegel quickly reached a settlement with the SEC by agreeing to appoint an independent examiner to look at its financial records dating to Jan. 1, 2000.
 
The examiner, Stephen Crimmins of Pepper Hamilton LLP, is expected to issue a report within four months.
 
What happens in the coming weeks will depend on the ability to get a new financier in place.
 
Possible candidates could be Dallas-based Alliance Data Systems Corp., which provides private-label credit card services to Crate and Barrel, Ann Taylor and The Limited, and General Electric Co.'s consumer finance arm.
 
That unit, GE Consumer Finance, is trying to acquire Mill Creek Bank, another private credit card issuer, from Conseco Inc. in a deal worth $323 million.
 
GE Consumer Finance would not return calls seeking comment. Officials at Alliance Data were not immediately available for comment.
 
The Spiegel catalog brand appears to be most affected by this development. A Spiegel spokeswoman said the brand generated 73% of its sales through its private credit cards. That percentage was far lower for Eddie Bauer and Newport News.
 
Another issue will be Spiegel's ability to withstand a softness with its existing catalog lines. The company said in a statement its sales had declined more than 19% to $255.7 million over the first eight weeks of 2003, as compared with $319.2 million generated during the same period a year ago.
 
"The women's apparel sector has been really tough for many catalog providers," said West.
 
Spiegel went before Judge Cornelius Blackshear of the U.S. Bankruptcy Court on Monday seeking orders to use $150 million in interim DIP financing, among other things. The results of that hearing were not known by press time.
 
Spiegel was represented in the case by James Garrity of New York firm Shearman & Sterling. The company's financial adviser was Miller Buckfire Lewis & Co.
 
Kosturos, who was hired March 1, is a principal with the crisis management firm of Alvarez & Marsal. The firm will also advise in the case.
 
Spiegel filed for bankruptcy with $1.737 billion in assets and $1.706 billion in debt.