Interest Rate Roundup

Tuesday, July 29, 2008

Retailer, restaurant, casino bankruptcies piling up as spending falls and economy slumps

The fallout from rising energy prices, the slowing economy, the slumping housing market, and tighter credit markets is increasing. Mid-tier department store Mervyns just confirmed what the Wall Street Journal reported earlier today: Namely, that it is filing Chapter 11 bankruptcy. Here's a WSJ excerpt on the Mervyn's saga, and the potential impact and causes:

"Mervyn's, which operates 177 stores, mostly in California, has been struggling in the face of sharp sales declines this year in California and Arizona, where the real-estate markets have collapsed. Nervous factoring companies, which provide financing for apparel makers, have cut off funding, leaving Mervyn's with limited merchandise for the critical back-to-school season. A spokesman for Mervyn's declined to comment.

"A filing by Mervyn's would follow those of several other retailers that have sought bankruptcy protection this year, including Steve & Barry's LLC, cataloger Lillian Vernon and home-products chain Linens 'n Things.

"My clients are all holding their orders [for Mervyn's] at this time," said Bob Carbonell, chief credit officer at Bernard Sands LLC, which advises factoring firms and apparel manufactures of the credit-worthiness of retailers. He said he also has advised clients to hold orders for Boscov's Inc., a beleaguered chain of 49 department stores. Boscov's, based in Reading, Pa., didn't return calls seeking comment.

"Our experience is that a lot of manufacturers and wholesalers are being very tentative with these types of struggling retailers," said Lee Diercks, managing director at Clear Thinking Group LLC, a financial-advisory and restructuring firm. "They've gotten burned so many times this year."

"If Mervyn's is liquidated, it would deal another blow to mall owners, which have seen a wave of store closings in the past year. Vacancies at malls in 76 major U.S. markets rose to 6.3% in the second quarter, the highest level since early 2002, according to real-estate-research firm Reis Inc. The International Council of Shopping Centers estimates that 144,000 stores will shutter their doors in 2008, up 7% from last year and the biggest increase in the 14 years the group has been tracking the figures."

Meanwhile, restaurant chains Bennigan's and Steak & Ale are filing for bankruptcy and likely going to liquidate, according to the Journal:

"National restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 locations and letting go of thousands of employees.

"It is one of the country's largest restaurant bankruptcies and eliminates two sit-down chains that have been part of the casual-dining landscape for decades. The chains will liquidate and aren't likely to re-open.

"Late Monday, managers at Bennigan's and Steak & Ale were told not to open restaurants the next day, according to two people familiar with the matter. Employees were told there wouldn't be enough money to pay them for the rest of the week, these people said.

"Leah Templeton, a spokeswoman for the company, said in an email that the companies that filed bankruptcy cases are popularly known as Steak & Ale, Bennigan's and Tavern restaurants. She said that not all stores using these trade names have filed bankruptcy, and that stores operated by franchisees aren't named as debtors in these filings. She said the filing doesn't include the company's Ponderosa and Bonanza restaurants, which operate under Metromedia Steakhouses Company L.P.

"The pub-themed Bennigan's had 310 restaurants in 32 states. It was founded in 1976. It is heavily concentrated in states like Texas, Illinois and Michigan. It posted U.S. sales of $542 million in 2007, according to Technomic Inc., a food-industry research and consulting firm."

Another major sector of the economy that's getting hit by a slowdown in consumer spending and travel: Casinos. So it's no surprise that Bloomberg is reporting on how MGM and Dubai World are having a tougher time obtaining financing for their massive CityCenter project in Las Vegas:

"MGM Mirage and Dubai World are late in raising as much as $3.5 billion for their $11.2 bllion CityCenter project in Las Vegas because banks saddled with debt to casinos and hotels are wary of making new loans.

"Deutsche Bank AG and Credit Suisse Group, the Zurich-based bank that advised Dubai World last year when it invested $5.1 billion in MGM, are among the holdouts, bankers with knowledge of the matter said. Funding was supposed to be completed by the end of June, MGM Chief Financial Officer Daniel D'Arrigo told analysts in May. President James Murren said Frankfurt-based Deutsche Bank has been part of every MGM loan since 1998.

"No company in America is having an easy time doing bank deals right now,'' Murren said in an interview. "There will be some banks that can't commit because they have a lot of exposure in the area or don't like the pricing.''

"Deutsche Bank, the biggest German bank, hasn't yet made a decision on financing CityCenter, said spokesman John Gallagher in New York. "We continue to evaluate the opportunity,'' he said. Duncan King, a New York-based spokesman for Credit Suisse, the second-largest Swiss bank, declined to comment.

"Wall Street firms are scrutinizing their extension of credit, particularly to the gaming industry, where the sentiment is pretty weak,'' said Michael Paladino, an analyst at Fitch Ratings in New York.

"The amount of commercial and industrial loans from banks, plus short-term commercial paper, fell almost 3 percent during the past year to $3.27 trillion, according to data compiled by the Federal Reserve."

Why the hesitancy? As Bloomberg notes, the slumping economy has hurt the bottom line at Vegas casinos, while tighter financing conditions have put the squeeze on developers:

"The Las Vegas casino industry has been struggling with revenue falling 16 percent in May, the fifth straight monthly decline, amid near-record gasoline prices and rising unemployment in the U.S., according to the Nevada Gaming Control Board.

"Deutsche Bank took over the $3.5 billion Cosmopolitan Resort & Casino in January after developer Ian Bruce Eichner defaulted on a loan. The Cosmopolitan, due to be completed next year, is on the Las Vegas strip near the Tropicana Resort & Casino, whose parent filed for bankruptcy protection in May.

"Deutsche Bank, Credit Suisse and Citigroup provided financing for the $27 billion takeover of Las Vegas-based Harrah's Entertainment Inc. by leveraged buyout firms Apollo Management LP in New York and TPG Inc. of Fort Worth, Texas, in January. Harrah's $1.4 billion of 10.75 percent notes due in 2018 have fallen to about 70 cents on the dollar to yield 17 percent since the start of the year."


Post a Comment

<< Home

Site Meter