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Furniture Brands reboots with Chapter 11

ST. LOUIS - Furniture Brands International filed for Chapter 11 bankruptcy protection last week, capping years of financial frustration, and announced a plan to sell off company assets and keep the business running with new financing.
     In its Sept. 9 filing in U.S. Bankruptcy Court in Delaware and a press release, the company said it expected to sell its Lane division within 30 days, although a buyer wasn't identified.
     Other assets - Broyhill, Thomasville, the high-end HDM brands and other businesses and properties - also would be sold, with a court auction anticipated in January. The lead bidder would be affiliates of funds management by Oaktree Capital Management, in a deal valued at $166 million.
     Another potential bidder, however, New York-based private equity fund KPS Capital Management, surfaced at a bankruptcy court hearing last week. A lawyer for KPS said the fund could offer more than Oaktree and that its bid would include Lane, the Wall Street Journal reported.
     In its bankruptcy petition, Furniture Brands lists assets of $546.7 million and debts of $550.1 million.
    Oaktree, which also has been a key stockholder in publicly held Furniture Brands, also has committed to $140 million in debtor-in-possession financing, including $50 million of new liquidity. Officials said that "will enable the company to operate business uninterrupted and continue to meet its financial obligations, including the timely payment of employee wages and benefits, continued servicing of customer orders and shipments, and other obligations."
     The company announced Thursday that it received court approval to immediately access $25 million, or half of the new liquidity provided by Oaktree. This will allow the company to operate its business uninterrupted by paying employee wages and benefits and to pay its suppliers in a timely fashion. The immediate funding also will allow the company to continue servicing and shipping customer orders.
Ralph Scozzafava     "After careful consideration of a range of alternatives, we firmly believe that our Chapter 11 process represents the best long-term solution for Furniture Brands to address its liquidity challenges, strengthen its operations and continue to provide our customers with the highest quality products and service that they have come to expect from us," Chairman and CEO Ralph Scozzafava said.
     "Our portfolio includes some of the most well respected brands in the furniture industry, and we are pleased to be partnering with Oaktree, which has deep experience working with Furniture Brands and other companies in our industry. We are highly confident that as a result of these actions, we will protect our valuable franchise and emerge as an even stronger company."
     While the Lane-branded business would be sold quickly, according to bankruptcy documents, its future is unclear. Furniture Brands also filed a federally required notice last week that its Lane plants in Mississippi could lay off as many as 1,451 workers.
     An FBI spokesman said the layoffs might not occur - whoever buys the Lane assets would make that determination - but the company wanted to give a potential buyer the flexibility to close the operations.
     Brands to be sold later in the Oaktree package would include Broyhill, Thomasville, Drexel Heritage, Henredon, Pearson, Lane Venture, La Barge, Hickory Chair, Maitland-Smith and Creative Interiors.
     In a declaration filed with the Chapter 11 case, company Chief Financial Officer Vance Johnston described the events that led to the filing, from the company's sagging financial performance to its recent trouble keeping enough cash coming in to pay its bills.
     Since peaking in 2004 at $2.4 billion, Furniture Brands' sales declined by more than half to $1.07 billion in 2012. The company took the sharpest hits in 2008 and 2009, but has been unable to recover from the recession. In the second quarter of this year, sales were down 11.3% from the same period a year earlier.
     The company said the weak economy and consumer reluctance to purchase big-ticket items were factors, but added, "some of the company's larger brands have lost some of their market share primarily due to competition from suppliers who are able to produce similar products at lower costs." It also cited competition from large furniture retailers that offer store-brand products.
     Declining sales led to the liquidity crunch, according to the declaration. A significant part of Furniture Brands' liquidity is tied to its asset-based loan facility. The sales declines meant that as the company reappraised its assets it had to write down their value, which reduced the amount it could borrow under the facility.
     In August, the borrowing base under the facility dipped below $25 million, which imposed a reserve requirement of $4.3 million - which "further constricted the company's already strained liquidity position," the declaration said.
     In addition, the company also faced another new reserve requirement from American Express. Much of Furniture Brands' sales are paid for by credit or debit cards, and it had agreements that allowed credit card companies, including American Express, to refund purchases of returned or disputed merchandise, charging the amount back to Furniture Brands.
    In the weeks leading up to the bankruptcy filing, American Express had begun to establish reserves for the chargebacks by holding back funds owed to FBI - which led to another constraint on liquidity, according to the documents.
     The company's stock price reflected the downhill slide, and FBI delisted itself from the New York Stock Exchange when it fell below listing requirements. At the time of the filing, it was trading for well below $1 on an over-the-counter market.
     Johnston's declaration also cited the company's projected pension obligations to employees, which as of the end of last year exceeded the value of plan assets by $191.8 million. In its second-quarter financial report, the pension obligation was listed at $208.7 million.
     Furniture Brands apparently is seeking to dump off the pension liability on the federal Pension Benefit Guaranty Corp., however, which is listed as the company's top unsecured creditor. That could free any asset buyers from responsibility for current or future pension contributions, although the pension recipients may not get the full amount they were promised.

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