A reprieve for Payless?

Home Channel News, July 16, 2001 by Jason Gonzalez

Retailer awaits court approval of new $160 million credit lifeline

LEE'S SUMMIT, Mo. - Payless Cashways struck an 11th-hour accord with its main lender, Congress Financial Corp. on July 2 that would provide the bankrupt retailer with a one-year, $160 million credit line and a final shot at restructuring into, a viable, lasting business.

The debtor-in-possession agreement, which is still subject to a July 19 approval hearing by the U.S. Bankruptcy Court for the western district of Missouri, was reached on the same day that Payless' court-granted 10-day extension was set to expire. The retailer said it would continue to use cash collateral reserves until the new agreement received court approval. Payless spent a full month trying to secure DIP financing - the critical Funds used by companies to continue operations while they reorganize through Chapter 11. Another lender, Hilco Capital LP, is also involved in the finance agreement, but its role was not immediately clear.

A major part of its reorganization, Payless told the court, would be its plan to close another 42 stores and lay off as many as 1,250 employees.

In exchange for the credit lifeline, Congress accepted a junior lien on all of the real estate owned by Payless, which at year end 2000 consisted of 112 of the then-128 Payless Cashways locations. Ben Mann, Payless' bankruptcy attorney, told NHCN that the retailer currently owns around 110 locations with an estimated value of $70 million.

According to the Kansas City Star, which attended the July 2 court hearing, Congress first rejected Payless' financial projections and comeback strategy and requested that Judge Arthur Federman force Payless into a going out of business sale. After hearing the arguments of Payless' president and CEO Millard Barron, the judge asked the two parties to make another attempt at resolving their differences, the newspaper reported.

During a recess, officials representing Payless and Congress started negotiating again and by late afternoon the two parties had reached a new $160 million credit arrangement. The terms of the deal require Payless to reduce the $160 million credit line to $140 million after 60 days and then to $130 million after another 60-day period.

Barron said the money would be used to replenish still-low inventories at many of the company's stores. Payless' top 15 unsecured creditors read like a who's who of lumber, hardware and building materials suppliers. Among them are Georgia-Pacific, which is owed $7 million; Masco, which is owed $2.3 million; Black & Decker, $1.1 million; Louisiana-Pacific, $652,427; and PrimeSource, $649,541.

Payless' nine-member unsecured creditors committee -- which consists of representatives from G-P, Masco, Motivation Excellence, General Electric, Stanley Works, Icon International, PrimeSource, Timberline and Henri Studios -- threw their support behind giving the beleaguered retailer a last shot at turning itself around.

Focus on a 'core' of 69 stores

If the court approves the Congress/Payless credit agreement, the retailer would then embark on its second Chapter 11 reorganization in the past four years. Payless is still burdened by about $340 million in long-term debt (down from about $1 billion), which it accumulated when its senior executives were forced to purchase the company in 1988 to thwart a hostile takeover bid and, to a lesser extent, when it filed for bankruptcy protection in 1997.

In this latest restructuring, however, Payless will carry on without two of its senior-level executives. The retailer announced on July 3 that Ed Zimmerlin, its senior vp-merchandising and marketing, and Frank Chambers, its executivepro business development, have left the company to pursue other interests. Zimmerlin joined Payless in 1998 after 25 years with Hills Department Stores, Hudson Bay Co. and other retailers. Chambers, a pro dealer veteran who's worked for Wickes, Pelican Cos., and Moore's Lumber & Building Supplies, joined Payless in March 2000. The retailer did not say say whether or not it would name replacements to those two positions.

At the court hearing, Barron revealed an outline of its proposed restructuring plan. The retailer, which had already closed more than 40 stores this year, wants to close and sell another 42 units and concentrate on a core of 69 locations. Barron did not state which locations the company intends to close nor did he mention which might form the core stores going forward. (According to Mann, Congress Financial Corp. would be entitled to the proceeds from any real estate sale that occurs.)

Mann also said that once the retailer had formed a "profitable core" of stores it would evaluate three options: remaining a standalone company, merging with another firm or putting itself up for sale. The dealer has until Oct. 1 to submit its official reorganization plan, he said.

Payless currently operates 110 retail stores, four PCI Builders Resource units and six manufacturing plants in 16 states.

Spiraling downward

Despite a 13-year-long strategy shift toward pro customers, Payless Cashways' net losses totaled $537.9 million in the fiscal years 1991 through 2000.