FAO Could Be Forced to Liquidate

One week after children’s products cataloger/retailer FAO said it had obtained the necessary financing to pull itself out of bankruptcy, the deal suddenly collapsed.

FAO announced on April 14 that its equity investors and bank lenders failed to come to final terms, killing the financing deal. Now the King of Prussia, PA-based parent company of FAO Schwarz, The Right Start, and Zany Brainy is scrambling for alternatives before April 18. That’s when the company’s right to use cash as collateral for the loans it owes to lenders expires—unless the lenders give FAO an extension.

“Unexpected complications” caused the deal, which included a $67 million revolving credit line from a group led by Fleet Retail Finance, a $10 million term loan from Fleet’s Back Bay Capital Financing division, and an agreement with an investor group headed by Kayne Anderson Capital Advisors to purchase $30 million in preferred stock, to come undone, says FAO spokesperson Alan Marcus. As a result, “we’re exploring every possible option,” he says, including obtaining replacement funding, the sale of all or portions of FAO operations, and, “as a last resort, liquidation. But we’re hopeful there won’t be the need to liquidate.”

Although Marcus won’t elaborate on the problem between the investors and lenders, “it had to do with differences in the final terms,” he says. “As a result of not being able to come to terms on an agreement, the equity funding has been withdrawn.”

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