Tuesday, January 23, 2001
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Posted on: Tuesday, January 23, 2001

Liberty House, creditors settle

By Andrew Gomes
Advertiser Staff Writer

Previous stories:
Liberty House continues to gain strength
Bankruptcy claimants vying to determine Liberty House's future
Liberty House finding its way
Hawaii’s oldest and largest department store could emerge debt free by the end of April from its nearly three-year bankruptcy, according to a settlement reached over the weekend by the retailer’s parent company and major creditors.

Under the deal announced yesterday, a group of Mainland lenders would gain control of Liberty House, leaving longtime owner JMB Realty Corp. of Chicago with no equity, a fraction of its claim and a pending tax liability.

The agreement "disposes of all issues that have challenged us in past negotiations and removes substantially all remaining obstacles to confirmation of a reorganization plan for Liberty House," said Liberty House president John Monahan.

The last-minute agreement offers a final measure of relief and hope for thousands of Liberty House employees and creditors who have endured years of uncertainty about the future of the retailer as it battled its way through bankruptcy proceedings.

The announcement of the proposed compromise pre-empted the start of a hearing in U.S. Bankruptcy Court yesterday morning in which JMB attorneys had planned to argue against a reorganization plan proposed by the lenders, Liberty House management and a committee of unsecured creditors.

Among the terms of the tentative deal, which is to be filed in court today:

Liberty House is valued at $190 million.

The lenders, who are owed $130 million by the retailer, would be issued $130 million in new Liberty House stock, as provided for under their original reorganization plan.

JMB would receive $5.1 million in notes for its $13.4 million claim. A JMB affiliate with an $8.5 million claim would be paid 40 percent ($3.4 million) in cash and 50 percent ($4.25 million) in notes. JMB’s distribution would be placed in escrow and used to pay a pending Internal Revenue Service tax claim if necessary.

About 2,000 unsecured creditors, mostly vendors, holding $40 million in claims would be paid per the original plan, primarily 40 percent in cash and 50 percent in stock.

Liberty House would keep open its downtown Honolulu store, which it had considered closing.

Employees would not be affected.

A new five-member board of directors would be appointed to lead the restructured company, including Monahan; Patricia Wachtell, managing director of Oaktree Capital Management; Robert Hockett, managing director of DDJ Capital Management; local retail developer Duncan MacNaughton; and another director to be appointed by the lenders. Oaktree and DDJ are the two largest secured creditors of Liberty House.

JMB attorneys did not wish to comment on the settlement yesterday, a spokesman said.

Tax issue remains

The deal at a glance

Who would own it

More than 70 percent of Liberty House would be owned by two private Mainland investment firms. A few other institutional lenders would own the remainder. Current owner JMB Realty Corp. would retain no equity.


About 2,000 unsecured creditors who are owed $40 million would receive 40 percent in cash and 50 percent in stock.

What’s next

Bankruptcy Judge Lloyd King will review details of the settlement today. An IRS tax claim remains to be resolved and also will be taken up in court today.

Eventual emergence

Lawyers in the case hope remaining issues are resolved quickly, allowing Liberty House to pay off its debts by April and emerge from bankruptcy three years and one month after filing for Chapter 11 protection.

The only remaining hitch is a $35 million IRS tax claim against a group of companies to which Liberty House belonged until February 1997. The IRS opposes a reorganization plan provision that estimates a reduced value of its liability, which could take another year or two to determine under an ongoing audit.

Last year, the IRS settled a $103.5 million tax claim against the same group of companies affiliated with JMB for $4.2 million.

Attorneys for the IRS, Liberty House, the lenders and JMB will try to work out the tax issue today before bankruptcy Judge Lloyd King.

Monahan called the possibility that Liberty House will emerge from bankruptcy by the end of April "very real," and praised employees and customers for their support.

"Many people contributed to achieving the results announced in court today, but the most important contributions came from our employees and our customers," he said. "The perseverance and hard work of the Liberty House employees was inspirational to me on a daily basis."

Monahan also reminded observers that JMB has owned Liberty House for years, not all of them bad. "We hope everyone will remember that most of those years were good ones for Liberty House and Hawaii," he said.

JMB acquired Liberty House in its 1988 acquisition of Amfac Inc., the retailer’s parent and one of Hawaii’s Big Five companies. Under JMB control, Liberty House did well until the Asian financial plunge of the mid-1990s curtailed spending by Japanese tourists, who had become the mainstay of the kamaaina retailer.

Operating losses in 1997 caused Liberty House to miss a series of loan payments in early 1998. Lenders moved quickly to seize control of the company by installing their own three-member board. But JMB filed for bankruptcy protection, preserving its board and sending the fight for control of the company into court.

Over the past three years, lawyers for both sides have made slow progress in the case, which has been marked by intense arguments and surprise twists, such as two failed attempts by Ala Moana Center owner General Growth Properties Inc. to pay off creditors and acquire the retailer out of bankruptcy.

Profitability returns

At the same time, Liberty House reduced its number of outlets and refocused on the local market, earning more than $8 million in profit, excluding bankruptcy expenses, in each of the last two years.

"I think they’ve done a great job pulling themselves out of this — and they have certainly seen extraordinary competition," said Carol Anne Dickson, a University of Hawaii associate professor of merchandising.

As for the post-bankruptcy future of Liberty House, Monahan said he doesn’t expect the institutional lenders would be more or less likely to sell or keep the profitable company than any other owner would. Wachtell of Oaktree Capital and MacNaughton of the Honolulu-based MacNaughton Group, both directors in waiting, declined comment. Monahan said he was not aware of any current interest by General Growth to buy Liberty House. A General Growth executive could not be reached for comment yesterday.

Under the reorganization plan, management projects earnings before interest, taxes, depreciation, amortization, reorganization and extraordinary items — a standard measure of a company’s health — to be $29.5 million this year and $32.3 million next year, compared to about $26 million last year and $24.8 million in 1999.

Upon reorganization, Liberty House’s estate and the company’s owners will distribute roughly $24 million in cash, including more than $16 million for bankruptcy expenses and about $8 million for unsecured creditor claims.

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