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Sunday, 29 March 2015 22:00

Picture changing for bankrupt Christian retailer

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Picture changing for bankrupt Christian retailer MIBIZ FILE PHOTO

Six weeks ago, when Family Christian LLC first filed for bankruptcy, the retailer articulated a plan that would save the company and help it emerge from its proverbial mountain of debt.

In a press release, web video and FAQ posted on its website, company executives assured employees, customers and suppliers that Family Christian Stores would remain open, people’s jobs would be retained and the current leadership would remain in control.

But after two bankruptcy court hearings, the outlook for the company now looks much different.

While the particulars remain a bit murky, what’s becoming clearer is that national retailer Family Christian Stores will likely have a new owner within 60 to 90 days as part of the bankruptcy of its parent company. Moreover, as the proceedings continue to develop, the bankruptcy has already begun to have a ripple effect in the Christian publishing industry.

Family Christian filed for Chapter 11 bankruptcy in February as it struggled to stay in business and pay off significant long term debt, which it said in court filings was between $50 million and $100 million.

A hearing in U.S. Bankruptcy Court for the Western District of Michigan on April 14 is expected to determine the bidding and auction process, after which Judge John T. Gregg said he would strongly consider motions to sell Family Christian’s assets.

A change in ownership could mean store closings, a reduction in headcount and other operational changes at Family Christian Stores, according to a bankruptcy and turnaround specialist MiBiz spoke with who asked not to be identified.

However, any operating changes would likely be dictated by the company’s cash flow, which should improve in the absence of the significant debt service that had strapped Family Christian’s operations in recent years, the source added.

While the structure of the new ownership is unclear, David Lefere, an attorney specializing in corporate law and business disputes at Mika Meyers Beckett & Jones PLC, said a private equity firm or a private investor from the capital markets could be a potential buyer of the company.

Lefere said it might also make sense for a fellow retail competitor or a publishing company to consider purchasing Family Christian’s assets, which include 266 brick-and-mortar retail stores in 36 states.

However, those niche publishers have been among the first to feel the impact of the company’s bankruptcy proceedings.

In a March 24 article, Publishers Weekly reported that an unnamed publisher sent an email to “authors and agents” noting that Family Christian’s bankruptcy could have an impact on its cash flow.

“The short-term impact of this unexpected event in our company’s cash flow has presented us with a significant challenge. We have taken steps to shore up this cash flow crunch, and fully expect to send your royalty payment within the month of March,” the publisher was quoted in the report.

Unlike the bankruptcy of a very large retailer, the Family Christian proceedings are the kind that will ripple throughout the industry almost immediately, the report noted.

In the case of the bankruptcies of very large mainstream book chains, the larger publishing houses can usually just eat the cost, Chip MacGregor, president of Oregon-based MacGregor Literary Inc. told Publishers Weekly. But in this case, for the niche Christian publishers who may be out several hundred thousand dollars in inventory, the situation can be devastating.

“This has hurt publishers, and has trickled down to authors and agents,” MacGregor was quoted as saying in the Publishers Weekly report.

The trade group Evangelical Christian Publishers Association (ECPA) reportedly will release the results of a recently-conducted survey that further explores the impact of the Family Christian bankruptcy.

ISSUE OF TRANSPARENCY

At a largely procedural hearing in early March, attorneys said the bankruptcy involves approximately 130 creditors, including publishers, distributors and landlords, as well as secured, senior lenders as large as Credit Suisse AG.

Included in the group of unsecured creditors are 27 publishers and other suppliers who filed a separate lawsuit against Family Christian earlier this month.

Upon filing for Chapter 11 bankruptcy in February, Family Christian proposed a 363 sale of its assets to a stalking horse bidder, one legally appointed to make a first bid on a distressed company.

Attorneys acting on behalf of the assorted creditors quickly objected as it became clear that the stalking horse was controlled by Richard Jackson, an Atlanta entrepreneur, CEO of Jackson Healthcare Inc. and the chairman of Family Christian. Jackson was among a group of three executives who bought the company in 2012.

He is also thought to control FC Special Funding LLC, a senior lender to the company.

Creditors believed that Jackson acting as a debtor, creditor and proposed stalking horse bidder was less than transparent.

Indeed, the United States Trustee in the case agreed.

“The debtors, the senior lender, and the stalking horse bidder are all ultimately owned or controlled by the same person(s),” wrote United States Trustee Daniel McDermott in an objection filed with the bankruptcy court on March 12. “This is a fast-track sale to an insider to pay off another insider, with little or no marketing time and bid procedures and sale terms that could chill competitive bidding.”

Family Christian ultimately withdrew the motion for the 363 sale to the stalking horse bidder in mid-March.

Attorneys for Family Christian said at the March 19 hearing that the motion was withdrawn because the proposed stalking horse bidder was perceived as being an impediment to the process.

Despite the concerns, Judge Gregg said there was no specific problem with an insider participating in the stalking horse process, so long as the involvement is disclosed.

“There was a very close relationship that was not disclosed until the First Day hearings, but it’s out there now and none of the lenders, the debtors, the ultimate parent or the former stalking horse is viewed as being a taint or impediment to this process,” Gregg said.

It remains unclear whether Jackson will be involved in the bidding process as it moves forward.

Read 3621 times Last modified on Monday, 30 March 2015 15:48

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