Spiegel Appears Near Chapter 11

For The Spiegel Group, the news continues to go from bad to worse. On March 11, the cataloger/retailer announced that it is being forced to pay back investors of its First Consumers National Bank (FCNB) subsidiary $2.2 billion in secured bonds sooner than planned. This latest turn of events could force the parent company of the Eddie Bauer, Newport News, and Spiegel catalogs to file for Chapter 11 bankruptcy protection.

“If we’re unable to find alternative sources of financing,” says spokesperson Debbie Koopman, “Chapter 11 would be an option. The securitization had provided a source of liquidity that won’t be available to us.” In other words, if Spiegel is unable to borrow enough cash to pay off bondholders and continue operations, it will be forced into a bankruptcy reorganization filing.

The Pay Out Events, or early amortization of all six of FCNB’s asset-backed securitization transactions, resulted from the poor performance of the bonds’ collateral tied to FCNB. As of March 7, the SEC would no longer allow Spiegel, Eddie Bauer, and Newport News to honor the private-label credit cards issued by FCNB.

March 7 was also the day that the SEC started a civil proceeding in Chicago federal court alleging that Spiegel’s public disclosures violated Sections 10(b) and 13(a) of the Securities Exchange Act of 1934.

Could the German Otto family, which owns 89% of the company, bail out Spiegel again less than a year since it invested $160 million in the cataloger? “Otto has provided securities for the bank last year as we worked to restructure our debt,” Koopman says, hinting that Spiegel has likely gotten all from Otto it could ask for.

Spiegel’s situation can be compared to that of former catalog giant Foster & Gallagher, says Jim Adams, managing director of Wellesley, MA-based investment bank Tully & Holland. Adams equates Spiegel’s reliance on its troubled credit-card business to Foster & Gallagher, which relied heavily on sweepstakes for income. “Spiegel has lived and died by its credit card, and that dragged them down,” he says.

Should Spiegel’s reorganize or, in fact, be forced to sell its catalog brands outright, Adams believes that Eddie Bauer and Newport News are strong brands and will survive, just as Foster & Gallagher title Walter Drake survived its parent company’s demise. Still, he says, “I’m sad it’s come to this.”

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