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Extra1/13/2009 1:04 PM ET

Which retailers are next for bankruptcy?

Consumers are pulling back, and lenders are reducing their exposure to merchants. Among those being squeezed are Circuit City, Loehmann's and Claire's stores.

By The Wall Street Journal

Drained by the worst consumer-spending slump in decades and burdened by debt, U.S. retailers are expected to begin a wave of post-holiday bankruptcy filings, altering the landscape at malls and on Main Streets across the country.

Retailers are particularly vulnerable in the current downturn after a decade of buoyant consumer spending, which encouraged them to overexpand and overborrow. Now, the banks and private investors who financed the boom are pulling back.

Several of the industry's biggest lenders, including General Electric's (GE, news, msgs)GE Capital, CIT Group (CIT, news, msgs) and Wachovia (WB, news, msgs), are tightening lending terms and reducing exposure to retailers. Their tougher terms are making it harder for retailers to find capital to reorganize under bankruptcy-court protection, as they were able to do in the past, meaning there are likely to be more liquidations.

Circuit City Stores (CCTYQ, news, msgs), which filed for Chapter 11 protection in November, warned Jan. 9 it risked liquidation if talks with two parties about a possible sale or cash infusion weren't successful.

Earlier last week, Goody's Family Clothing in Knoxville, Tenn., announced it was liquidating its remaining 287 stores -- just three months after exiting bankruptcy. Against All Odds USA, a 64-store clothing chain, said Jan. 5 it was entering Chapter 11 proceedings in hopes of selling itself or reorganizing.

According to ratings company Standard & Poor's, nine U.S. retailers and restaurants, including off-price apparel chain Loehmann's Holdings, drugstore operator Duane Reade Holdings and jeweler Finlay Enterprises, are at significant risk of default, with junk-bond ratings of CCC, or "very weak." A year ago, S&P had six issuers on its list, including three that eventually filed for Chapter 11 protection: Linens 'N Things, Vicorp Restaurants and Buffets.

Along with Finlay, which operates Bailey Banks & Biddle jewelry stores, bankruptcy experts think regional department store chains Bon-Ton Stores (BONT, news, msgs) and Gottschalks (GOTT, news, msgs) and fashion-accessories retailer Claire's Stores may be under the most stress. They base that assessment in part on the trading level of the companies' bonds, which indicate investors think they will recover only cents on the dollar.

"A lot of retailers survived through the holiday season because they built up their inventories in the summer before anyone, like their vendors, knew it would be this bad. But now you will see a lot of filings," said Michael Henkin, managing director and co-head of the restructuring group at investment bank Jefferies (JEF, news, msgs).

Loehmann's, Duane Reade, Bon-Ton Stores and Claire's Stores, however, dismissed any suggestion they might be at risk. Finlay and Gottschalks didn't respond to messages seeking comment.

"We have sufficient cash to sustain our operations, and pay the interest on (our) notes," said Loehmann's President Robert Glass. "Our parent has put money into the business, and has continued to be very, very supportive." Istithmar, a Dubai investment fund that bought Loehmann's in 2006, declined to comment.

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Wave of retailer bankruptcy filings expected
Struggling retailers are scrambling to reinvent themselves in order to survive until consumers begin spending again, says Tracy Mullin of the National Retail Federation. (Jan. 12)
A spokesman for Duane Reade, which is owned by private-equity firm Oak Hill Capital Partners, said the chain is "a vibrant and viable retail operation, and any suggestion to the contrary is inaccurate." He said the chain has recently seen "positive trends" in sales at stores open a year or more, as well as other metrics, and that it has "no liquidity issues."

The spokesman also cited almost $70 million in available borrowings under a revolving credit agreement as of the end of 2008. Duane Reade has no debt coming due before the second half of 2010, he added.

Continued: Big gap between debt, earnings

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