Will Whitehall's Liquidation Make Vendor Financing More Difficut For Finlay?

Implications: The courts decision on whether consignment goods will be a part of the Whitehall liquidation sale could make vendor financing for Finlay Enterprises and many mid-sized jewelry more difficult, if not impossible this fall. 

Analysis: Whitehall vendors that supplied about $63 million in consignment goods have more jeopardy now that Judge Gross ruled that the company could include memo goods in the sale saying "that Whitehall is proceeding with the sale at their own risk with the consignment good uncertainty."  According to court papers, the Judge deferred the decision until July 24th.  

However, with historical precedent against them and the fact that UCC filings are classic example of ‘form over substance’, don’t be surprised if consignment vendors are classed as general creditors.   Meanwhile, secured creditors will be even more insistent on including consignment merchandise in the sale now that the Judge denied stalking horse fees of about $940 million.  This means there will be no minimum bid against which competitive buyers, if any, will have to bid against.   

The end result will probably be a sale of all Whitehall inventory in order to maximize the amount cash available to all classes of creditors through the liquidation.  Some may contend that won’t maximize the firms' value but it will maximize the amount of cash proceeds from the sale, probably the court’s first priority in the event a cash buyer doesn’t step forward. 

After the sale, the creditors committee will have to submit a plan to the court on how the proceeds should be distributed.  But it’s pretty clear that secured bank debt and debentures owned to hedge fund owner/investors will have first priority.  The remainder, if any, will be distributed to the unsecured creditors.   

Consignment goods creditors could be set up as a separate preferential class if the unsecured creditors committee agreed.  That would provide a procedural precedent that could help protect consignment vendors going forward.  However, it’s problematic whether current suppliers would ever agree to such an idealistic compromise.  

What is certain is that suppliers will have to rethink their plans to extend both credit and merchandise on consignment to many jewelry retailers this fall.  Clearly it isn’t business as usual and there are more large and mid-sized jewelry operators that will have liquidity problems in January 2009.  For instance, Finlay Enterprises.  With more owners’ investment secured by offsetting secured debt, UCC vulnerable in a pure liquidation, and large chains with liquidity problems, vendors have more risk than ever.