Hills hits deadline; seeks new credit

Hills hits deadline; seeks new credit – Hills Department Stores Inc

Laura Liebeck

Hills Hits Deadline; Seeks New Credit

CANTON, Mass. — While negotiations continue between Hills Department Stores and its bank group over new financing schedules for the beleaguered chain, a number of manufacturers have stopped shipping merchandise to the stores.

This occurred after Hills cancelled payments to vendors and missed a scheduled interest payment on bonds Jan. 15.

Nevertheless, the business is operating normally at the store level, said company spokesman Mallory Factor, who did not identify the vendors who stopped shipping merchandise.

Hills’ financial troubles came to a head Jan. 15 when the company skipped the scheduled interest payment on its 11% Convertible Junior Subordinated Debentures due in 2002. Hills made the decision to forego the interest payment while negotiating with its bank group to restructure the company’s balance sheet and secure new debt and equity financing. The debentures have a 30-day grace period, which expires Feb. 15.

The glitch in the negotiations stemmed from the bank group’s unwillingness to renew certain lines of credit. The discounter had found some unidentified investors “prepared” to inject up to $100 million into the chain. Thomas Lee, Hills’ chairman, has been identified as part of the investor pool.

Hills’ bank group is led by Bankers Trust Co., N.Y., and Mitsui Taiyo Kobe Bank, Japan. Meetings with the banks were held in New York from Jan. 23-25.

As a result of the Jan. 15 announcement to skip the interest payment on its convertible debentures, Moody’s downgraded the chain’s debt rating on Jan. 17, affecting $267 million of long-term debt.

Moody’s said the downgrade reflects its expectation that Hills’ restructuring will “result in significant losses for existing bondholders. Without the restructuring of its public debt and an infusion of new capital, Hills will likely violate bank covenants requiring minimum earnings performance.”

Moody’s lowered its rating on convertible debentures to Ca from B3; senior notes to Caa from B2; and subordinated debentures to Ca from B3.

In early January, Hills announced that it would close 28 stores, half of them former Gold Circle units, and lay off 3,000 workers in an effort to reduce debt. The chain also said that it would take a non-cash charge of $125 million against fourth quarter earnings as a result of the store closings and restructuring costs, and said it hoped to pay down $200 million in debt this year plus initiate a store remodeling program expected to cost between $400,000 and $500,000 per unit.

Through three quarters ended Nov. 3, Hills posted a net loss of $36.1 million. In December, however, sales rose 6.6% to $315.5 million and same store sales rose 5.7%, actually outperforming many other retailers.

On Dec. 31, 1990, the discounter made its scheduled $43 million principal payment to bondholders of its senior notes, showing that the chain was liquid during the crucial fourth quarter when retailers are supposed to have cash.

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