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Cash-Strapped Forever 21 Seeks Suitor to Stave Off Liquidation

Bankrupt fast-fashion chain Forever 21 Inc. will test the auction market once it secures a so-called “stalking horse bidder” in the hopes of landing a buyer and avoiding the retail graveyard.

According to court records, the Los Angeles-based retailer, which filed for bankruptcy court protection on Sept. 29 after months of speculation, is in talks with a range of potential investors. Even Forever 21 finds a leading candidate, there’s no guarantee a stalking horse would keep the operation in business. Liquidators commonly bid on retail companies going through bankruptcy, while far fewer want to assume the risks of keeping the business afloat.

“The debtors contacted more than 115 parties soliciting proposals to recapitalize the debtors and otherwise maximize recoveries for their creditors,” the retailer’s lawyers said in court filing on Thursday. “Among other things, the debtors have explored raising additional debt through a variety of structures, raising additional capital through an equity raise, and selling the debtors’ assets.”

Forever 21 is keeping its options open. While sale talks are in play, the company is also having conversations that involve “developing bids for alternative transaction structures,” court documents said.

According to the filing, bid procedures will entertain any qualified bidder that has a “valid and perfected lien on any assets,” making it a secured creditor, to credit bid on all or a portion of the allowed secured claims.

The filing didn’t indicate who the retailer is in talks with, but media reports suggest that brand licensing firm Authentic Brands Group–which just acquired the Barneys New York name–might be contemplating a run for the fast-fashion chain. A spokesman at ABG did not return a request for comment.

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At the top of the unsecured creditor totem pole is real-estate investment trust firm Simon Property Group, which is owed $8.1 million. Brookfield Property is second at $5.3 million and Macerich comes in third at $2.7 million.

Because Simon Property Group is Forever 21’s biggest landlord, the rumor mill has been working overtime with speculation that Simon may have a role connected to a potential ABG bid. The two have an existing relationship through Simon’s joint venture with ABG and fellow REIT General Growth Properties taking teen retailer Aéropostale out of bankruptcy back in 2016. But Forever 21’s co-founder and co-owner Don Won Chang has previously asked landlords to lend a helping hand to spare the chain from filing for Chapter 11. However, talks with both Simon and Brookfield broke down.

Chang has also tried to source new capital to prop up the business, but that too has proven unsuccessful, perhaps because he has insisted on maintaining control of the company.

The retailer and its team of bankruptcy advisors have left no stone unturned in their effort to keep the retailer alive. And whether they can succeed will have an impact on at least 1,300 vendors and suppliers who rely on the fast-fashion chain to keep their businesses afloat.

“The debtors make up a substantial portion of these vendors’ businesses,” Jonathan Goulding, principal at Alvarez & Marsal North America, said in a court document filed shortly after the Chapter 11 filing, referring to the retailer’s supplier base.

It’s too soon to tell how talks could end.

Forever 21’s lackluster holiday results and dwindling cash balances do not help its case. But Jamie Salter is a savvy negotiator steering ABG, whose model revolves owning intellectual property assets.

If Salter can find an operator for the stores as he did with Aéropostale, then he’ll likely wield the dismal holiday sales and poor cash position to negotiate a stronger deal.

Even if an asset liquidation might benefit unsecured creditors, bankruptcy judges seem to favor trying to keep a business in operation in order to spare jobs, a consideration that was evident in the case of Sears—when the bankruptcy court approved the chain’s sale even though creditors were pushing for a liquidation.