Merry-Go-Round seeks cash to avoid bankruptcy

December 17, 1993|By Ross Hetrick and Ian Johnson | Ross Hetrick and Ian Johnson,Staff Writers

Merry-Go-Round Enterprises Inc. negotiated yesterday with its banks for a new line of credit as fear spread that the Joppa-based retailer was on the verge of filing for bankruptcy.

Investors reacted by sending the company's stock plunging 54 percent, and the shares were the most actively traded issue yesterday on the New York Stock Exchange.

The company said little yesterday, issuing only a one-paragraph statement that it had not reached an agreement with its lenders to shore up its finances. "The company will announce its plans and the results of its discussions at the appropriate time," the statement said.

A spokeswoman, Carolyn McNabney, said the company was standing by a previous comment from Michael Sullivan, president of the company, that Merry-Go-Round had no plans to file for bankruptcy. "Nothing is ever out of the question, but that's not the solution we're working towards," Mr. Sullivan told the New York Times.

Analysts and other observers, however, said the possibility of a Chapter 11 bankruptcy filing is becoming more real. Unless Merry-Go-Round and its lenders can reach an agreement, "we do think some legal action to help resolve these issues is a distinct possibility," said Maria L. Medaris, an associate retail analyst for Alex. Brown Inc., a Baltimore investment banking firm.

In reaction to the clothing chain's troubles, Alex. Brown lowered its investment rating for Merry-Go-Round from a neutral to a "source of cash," the equivalent of a sell, Ms. Medaris said.

Reacting to reports that Merry-Go-Round had missed payments to many of its suppliers last Friday, investors pushed the stock's price down 71.4 percent in early trading yesterday, to a 52-week low of $1.75 a share, from $6.125 as of the close Wednesday. The price recovered somewhat during the day, closing at $2.875 a share, down 54 percent.

With 9.7 million shares traded yesterday, Merry-Go-Round was the most active stock on the NYSE. By comparison, on Wednesday, 253,000 shares of the stock were traded.

The company operates stores under the names Merry-Go-Round, Attivo, DJs, Dejaiz, Cignal and Chess King. Normally, the employment is 17,000 to 18,000, but during the Christmas holidays it can reach 25,000, according to Ms. McNabney. The most immediate problem facing Merry-Go-Round is negotiating a larger line of credit with a group of seven or eight banks, Ms. Medaris said. These talks have bogged down over the banks' desire to use the company's inventory as collateral for the loans.

But this would put Merry-Go-Round in conflict with its factoring companies, which finance the purchase of the company's inventory by advancing money to the company's suppliers on behalf of Merry-Go-Round. In return, the factoring companies get accounts receivables, or IOU's, payable from Merry-Go-Round to the supplier. In this way, a factoring company is a stand-in for the supplier and takes the risk of not being paid by a retailer.

Allowing the banks to use Merry-Go-Round's inventory as collateral would remove a possible source of repayment to the factoring companies. If factoring companies fear that Merry-Go-Round has less ability to make payments, they are unlikely to extend the company credit, thereby cutting off a key source of temporary financing.

"We have to sit tight," said Richard Posner, executive vice president of Credit Exchange Inc., a factoring company in New York. "If they get an agreement [with the banks], it has to be without the liens. If they don't get an agreement, then they're in bankruptcy. It's that simple."

Poor sales

Like other retailers of young-men's clothing, the 1,460-store chain's problems stem from its failure to latch on to any sustainable fashion trend recently, and sales have been poor.

Merry-Go-Round lost $38.5 million in its third fiscal quarter, which included a noncash charge of $35.1 million primarily to reduce the book value of clothing, like hip-hop styles, that were not selling.

The company also said earlier this month that it was closing 30 stores within a few years along with 50 Chess King store, that was previously announced.

The company broke one of the covenants it had with its lenders by reporting a $39.1 million loss in the first nine months of its fiscal year, Ms. Medaris said.

Merry-Go-Round's problems mounted last month when some credit-rating agencies and factoring companies warned manufacturers against shipping goods to Merry-Go-Round.

A steady decline in the stock was temporarily halted two weeks ago, when Leonard "Boogie" Weinglass, co-founder and chairman of the company, said he was taking over the company's beleaguered merchandising operation. Mr. Weinglass told an

alysts at the time that the company was current on payments and did not intend to fall behind, Ms. Medaris said. But in the wake of the new developments, those assurances have melted away.

"These newer developments . . . have led us to a point we are increasing concerned about the company's long term future." Ms. Medaris said.

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