Prime-time rescue in works

Outlet center owner arranges with Lehman to get needed cash


June 22, 2000|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Loans of up to $110 million are expected to lead Prime Retail Inc. out of a financial crisis and remove the threat of bankruptcy, the company said yesterday.

The troubled outlet center owner announced a financing agreement with Lehman Bros. Inc. just before the company's annual meeting in Baltimore.

"We can learn from our mistakes and go on," Glenn D. Reschke, president and acting chief executive officer, told a packed audience of shareholders. "There is a way out of this crisis."

FOR THE RECORD - A photo caption in yesterday's Business section erroneously attributed a comment that Prime Retail Inc. would likely not pay a dividend for at least two years to Glenn D. Reschke, president and acting chief executive officer. The comment was made by David M. Fick, an analyst.
The Sun regrets the errors.

The Lehman Bros. deal consists of a three-year, $90 million loan partially secured by some of Prime's outlet centers, either as mortgages or equity stakes. It also includes a $20 million mortgage on a shopping center the company is opening in July in Puerto Rico. In the deal, Prime will grant Lehman Bros. warrants to purchase the company's common stock. It also hired Lehman Bros. as its financial adviser.

The company said it would not disclose borrowing costs or terms of the warrants until the loans close in 30 to 60 days. "It doesn't come without a price," Reschke said. "This will be expensive money. But we can retire it on our timetable."

The commitment from Lehman Bros. represents a first step in turning around a company troubled by high debt, lower occupancy rates and a plummeting share price, said Reschke, who has been acting CEO since the February resignation of former CEO Abraham Rosenthal.

He blamed the company's troubles on its swift growth into the world's largest outlet center owner by merging with Horizon Group in mid-1998 and on costly ventures - since abandoned - such as starting a chain of retail stores and attempting to start an Internet mall. Then occupancy rates fell, triggering the financial crisis, Reschke said.

"The company does have good cash flow from its projects," he said. "We just need time to apply the cash flow to debt and need time to sell assets."

Prime will use proceeds from the loans to pay off up to $84 million of short-term debt, with the rest going to marketing and shopping center improvements to help attract and retain tenants.

Some of the financing will help the company fund previously announced plans to spend $4 million on marketing and $11 million in physical improvements to centers.

The company plans to modify its covenants under existing loans, allowing it to be in compliance with all its debt obligations at the time the loans close.

The infusion of cash will also give the company the breathing room it needs to sell of some of its shopping centers, a step Reschke said is necessary to reduce overall debt.

He said the company has identified about half a dozen, as-yet unnamed centers, and is negotiating with several potential buyers.

The deal should give the company a much-needed boost, said Charles A. Post, a vice president with Friedman Billings Ramsey.

"This transaction is a positive, although it's expensive," Post said. "Lehman's a big name making this size loan. This facility takes care of all the short-term debt maturity. The real concern of Prime being a bankrupt concern has somewhat lessened."

But David M. Fick, a managing director at Legg Mason, disagreed.

"Our view is this is a terrible transaction for Prime shareholders," Fick said. "The entire strategy of the management team will ensure the stock will continue to trade for under the $2 range for the foreseeable future." Prime shares rose 43.75 cents to $1.4375 yesterday.

Taking on the monthly loan payments will most likely mean no dividend payments for shareholders for at least two years, Fick said. He estimates that Prime will have to pay interest rates of 14 percent to 15 percent, and that the warrants granted to Lehman Bros. will dilute existing shareholders' stock by 10 percent.

"These guys were drowning in debt," Fick said. "Lehman is throwing them a lifeline and trying to figure out the terms for pulling them in, but they're still in the water."

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