Finlay to Declare Bankruptcy Unless Vendors Comply-Part 1

Summary

Finaly tries to delay the inevitable if it can get certain suppliers to reschedule payments for last years merchandise.  Here's the deal as reported and what it means to the industry.

Analysis

According to unconfirmed reports, Finlay Enterprises has negotiated temporary financing with its two largest creditors to prevent its immediate bankruptcy, provided the company receives about $25 million in concessions from vendors.  The concessions are in the form of delayed payments to vendors.  Finlay’s has provided a provisional payment schedule whereby participating vendors would stand 3^rd in line behind the banks and secured debt holders.  According to reports from the JCK, vendors that agree would receive 20% of their receivables in 5 days, 10% in 90 days, 10% in 150 days, and the remaining 50% in 180 days.  The offer is what bankers frequently call a hammer. 

Essentially, Finlay is offering to pay up to $25 million to theses suppliers over the next 180 days in return for the promise of better security if the company files for bankruptcy with in next six months.  Otherwise they get a part of what’s left over after the banks and the secured bond holders recover their debt which could amount to pennies of the dollar if the company is liquidated. 

      

What does this mean to non participating suppliers isn’t clear from the report.  According to last year’s balance sheet, Finlay had $110 million in accounts payables as of February 2, 2008.  What their current account payables are is uncertain, but it’s likely to be about 75% of Finlay’s last years payables.  Excluding the $25 million, upwards of $50 million could be in default as unsecured debt.

 

Finally, what Finlay expects from suppliers going forward is also uncertain.  Even if the company offered 3^rd in line security to suppliers that continue to ship merchandise between now and August, there is no assurance that participating suppliers would recover much more than unsecured creditors.  That’s because liquidation values have declined and will continue decline as more surplus goods comes to market.

 

What the industry should do is unclear.  But there doesn’t seem to be any significance to the August 2009 target date.  Clearly, no one expects the economy will turn around in the next six months.  On the other hand, the ploy does buy time for Finlay’s creditors to find a buyer for the company or work out a deal with key department stores like Macys and Dillard to buy inventory and operate the jewelry operations in house.  Such a deal would increase banks and debt holder’s recovery as well as pay suppliers for merchandise sold to department stores.  But it doesn’t address suppliers that sold Finlay product for Bailey Banks and Biddle, Carlyle, or Congress jewelers.

What’s best for the industry and what’s the easiest isn’t necessarily the same thing.  No one wants to see more unemployed jewelers; but the sooner the weak links are eliminated from the market, the quicker the survivors will recover and begin to grow.  With that growth will come new jobs and a brighter future.  The fact is Finlay’s problem isn’t totally the result of the recession.  Its department store jewelry business has been losing market share for a decade and despite its best efforts, the company has brought neither great merchandising skill nor competitive advantage to its high-end jewelry segment. 

 

In any event, nothing precludes Finlay from filing bankruptcy in 179 days and defaulting on all its secured and unsecured debt, including the 50% portion remaining to be paid to participating suppliers.  The real question isn’t can Finlay survive, but whether a dollar liquidated now is worth more today than a dollar liquidated in six months.