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Analysts: Emergence from Chapter 11 Won’t be Easy

January 13, 1992

CINCINNATI (AP) _ Federated Department Stores Inc. and Allied Stores Corp. are in the final weeks of preparing to become one merged company after two years in bankruptcy court reorganization.

But their emergence in a struggling economy could be difficult, industry analyst Terence McEvoy said Monday after the retailers announced that a bankruptcy judge had signed a confirmation order approving their reorganization plan.

″This kind of economy, it ain’t great. It’s not a whole lot of fun out there,″ said McEvoy, vice president for research at Janney Montgomery Scott Inc. in New York. ″Consumers still feel very constrained and unwilling to spend. They seem to be staying away in droves.″

Department stores are among the hardest hit entities in the retail sector, McEvoy said.

Federated and Allied would emerge from reorganization facing interest payments on new debt of more than $400 million a year. The companies have consistently reported losses in recent months, but executives have been pleased with better-than-projected cash flow from operations.

The companies were forced by the recession to become leaner and should be able to compete through revised merchandising and marketing strategies, said Janet Mangano, vice president of Burnham Securities Inc.

She praised Allen Questrom, chairman and chief executive officer of Federated and Allied, for retooling a company with equity and new capital structure she said should be attractive to investors.

″I think that they’ve really been put through the test of fire. ... I think that Allen Questrom deserves 10 stars in really overseeing an incredible effort in shaping up an attractive new public company,″ Ms. Mangano said.

U.S. Bankruptcy Judge J. Vincent Aug Jr. on Friday signed a confirmation order approving the retailers’ reorganization plan. Under the plan, creditors are to receive settlements ranging from 7 percent of 100 percent of what they are owed, plus interest, paid in combinations of cash, stock and notes.

Federated and Allied hope to emerge from reorganization as soon as Feb. 4 as one publicly traded company, Federated Department Stores Inc., listed on the New York Stock Exchange. The company’s creditors will be the major owners at the start.

About 80 million shares of common stock worth $2 billion will be issued to creditors. About $4.7 billion in debt will be erased, leaving about $3 billion in debt.

Federated and Allied have about 45,000 creditors, including suppliers and retired employees.

Creditors realized their best chances of recovering money would be to support the return of Federated and Allied to the market as operating businesses, said Lewis Rosenbloom, lawyer for Federated’s unsecured creditors who are owed about $300 million.

Federated and Allied filed for protection from creditors on Jan. 15, 1990, creating the biggest reorganization case in American retailing history. The companies were burdened with $7.7 billion in debt, mostly inherited from Toronto-based Campeau Corp.’s junk bond-financed purchases of Allied in 1986 and Federated in 1988.

The Federated and Allied store groups include Bloomingdale’s and Abraham & Straus of New York City; Burdines and Jordan Marsh-Maas Brothers of Florida; Lazarus, based in Cincinnati; Rich’s of Atlanta; The Bon Marche, Seattle; Jordan Marsh, Boston; Goldsmith’s, Memphis, Tenn., and Stern’s of Paramus, N.J.

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