FBI faces financial hurdles
Heath E. Combs -- Furniture Today, September 2, 2013
HIGH POINT - Furniture Brands International is stuck between a rock and a hard place.
It has had six years of consecutive losses, more than $200 million in underfunded pension obligations, and faces shareholder lawsuits. It has voluntarily delisted its shares from the New York Stock Exchange and has hired restructuring and turnaround consultants.
At this point the big question for Furniture Brands is: how long can it continue to borrow money, or access liquidity - essential for paying its operating expenses and debt.
FBI's pension liability also could be a drag on its ability to sell its brands to raise cash. Based on recent federal court rulings affecting other companies, potential buyers of Furniture Brands assets might be on the hook for those obligations.
Looking at liquidity, FBI's main borrowing facility on June 30 - an asset-based loan -(ABL) soon may not be much of a line of credit at all. FBI's significant sources of liquidity are cash from working capital and borrowings from its asset-based loan.
Furniture Brands officials were unavailable for comment on this story.
FBI said in its second quarter report it will likely fall below $25 million in availability on its ABL in the third quarter, which will further reduce its ability to borrow on the ABL unless it can get waivers from lenders. On Sept. 29, 2012, its total availability was $94 million.
In its second quarter report, FBI said that at the end of June it had about $46 million in liquidity consisting of the $37 million available under its asset-based loan and $8.8 million in cash and cash equivalents. How much FBI can borrow from the ABL is based on "eligible" accounts receivable and inventory.
For the second quarter FBI had an operating loss of $43 million. Its ability to absorb such losses and stay liquid - in the face of continued declining sales - continues to break down.
Securities firm Stifel Nicolaus said in an Aug. 7 research note that it estimated the company would lose another $30 million in the second half of 2013 and run out of money in the first half of 2014. It said liquidation or bankruptcy was imminent.
An analyst at another firm, Budd Bugatch of Raymond James, said, "As you lose money (your liquidity) becomes a bigger and bigger issue. You can't do that forever. That's the problem.... They've eroded all of their safety."
FBI may also find it difficult to generate cash by selling assets. The company lists $547 million in assets, including trade names, inventory and property.
Many of its assets secure debt related to its lines of credit. According to its most recent quarterly report, FBI's term loan - now maxed out - is guaranteed by a first lien on "substantially" all of its intellectual property, real estate, fixtures, furniture and equipment and capital stock.
This year, the original lenders of the term loan assigned their entire interest to an affiliate of Oaktree Capital Group. That company's affiliates are known to the furniture industry as an investor in International Market Centers.
FBI's asset-based loan - its main remaining line of credit - is secured by a lien on FBI's accounts receivable, inventory, cash deposit and securities accounts and related assets.
The company said in its most recent quarterly report that the ABL can limit FBI's ability to "incur indebtedness and contingent obligations, make investments, intercompany loans and capital contributions, and dispose of property or assets."
Industry analyst Jerry Epperson of Mann, Armistead & Epperson said he believes that Furniture Brands would delay a bankruptcy filing as long as it could to see if other options would work. While it's difficult to put a value on the brands the company owns, Epperson said there's no question they still have value.
"Each of those names that company owns brings up an image, especially with our retailers and secondarily with our consumers," he said. "Not all of those names are consumer recognized names but they're well known and respected in our business. Even if they're not the home run balls that they once were, they're still very, very respected."
And then there is the company's pension, approaching 20,000 beneficiaries, according to FBI's last conference call, many going back to the days of predecessor company Interco. FBI said in its last quarterly report that the pension plan - a liability of $208.7 million - is one of the primary items affecting its liquidity. Thus far this year the company has contributed $2.8 million to the pension, compared to $3.2 million last year.
Some industry analysts point to problems the pension could pose to a sale of assets. If buyers felt that they had to absorb liability for pension obligations in a sale, they might be less willing to buy. A recent federal court decision involving private equity firm Sun Capital upheld that principle - it was held liable for millions in pension liabilities for a company it had acquired, according to news reports.