Giddy: Case study

Case study
Linens 'n Things -- A Failed LBO

Prof. Ian Giddy, New York University

Linens Holding Co. filed for bankruptcy on Friday, May 2, 2008, hoping to tap a $700 million debtor-in-possession loan from prepetition lender General Electric Capital. The second-largest U.S. household retailer plans to continue operating during its reorganization

Linens Holding, the parent company of Linens 'n Things Inc., was to appear before Judge Christopher Sontchi of the U.S. Bankruptcy Court for the District of Delaware in Wilmington for interim approval to use its DIP and cash collateral at a hearing scheduled for late Friday.

Leon Black's New York private equity firm, Apollo Management, owns 99.59% of the equity in Linens and is expected to take a big hit from the bankruptcy filing.

The bankruptcy also marks the resurfacing of GE Capital, owed $369.3 million in prepetition debt, as a major DIP lender. According to BankruptcyInsider.com, this is the largest DIP participation by GE Capital since it provided $1.6 billion of a $2.25 billion DIP for bankrupt Delta Air Lines Inc. on Sept. 14, 2005. The DIP, which includes $400 million for letters of credit, carries an interest rate of prime plus 175 basis points or LIBOR plus 325. If Linens defaults on the DIP, pricing will increase by 200 basis points. The DIP matures when its plan is confirmed and has a 2% closing fee and a 0.375% unused facility fee.

Linens of Clifton, N.J., also has $650 million of senior secured floating rate notes due 2014, with Bank of New York Mellon Corp. as the indentured trustee. Linens had a forbearance on the notes until May 13, 2007. The notes were issued to finance a February 2006 buyout by Apollo, which purchased Linens for $1.3 billion.

Apollo, along with co-sponsors National Realty & Development and Silver Point stands to see its initial $648 million equity investment largely, if not totally, wiped out. Apollo has reportedly been buying the floating-rate notes in the secondary market to strengthen its hand in the restructuring process. On Friday, those notes were trading near 36 cents on the dollar, according to Standard & Poor's Leveraged Commentary and Data unit.