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More than a week after unnamed sources at several newspapers predicted Linens ‘n Things was on the verge of filing for chapter 11 bankruptcy protection, the Clifton, NJ-based home furnishings chain was still holding on. On April 15, it deferred a $16.1-million quarterly interest payment to holders of its floating rate notes due 2014.

In a statement, Linens Holding Co., the parent company, also said it was in discussions with an ad hoc committee of holders of the notes regarding a restructuring of its capital structure and said the lenders were “supportive.” Two days later, it announced that it had retained the New York City-based investment banking firm of Financo Inc., adding it to Conway, Del Genio, Gries & Co., LLC, which had previously been retained as financial advisor.

“We are committed to exploring all reasonable avenues in our efforts to strengthen the company and to adopt a financial solution that recognizes the inherent value of the Linens ‘n Things’ business,” says Robert J. DiNicola, chairman and CEO, in a statement. In a published financial update, DiNicola cited “the increasing deterioration of the credit markets and the residential real estate meltdown, both stemming from the turmoil in the subprime mortgage market, and the resulting downturn in consumer spending, especially in the home sector,” which combined to create “acute financial challenges.”

Beyond that, he also referred to “the rapidly increasing financial storm outside the company (that), together with our operating results, have accelerated credit and insurance problems for our vendors, causing them to recently begin imposing significantly more restrictive payment terms.”

Calling the current housing situation “the worst housing crisis since the great depression,” Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based national retail consulting and investment banking firm, says home furnishings is “the worst sector in retail.” He lists numerous retailers in the sector that are have either filed for bankruptcy protection or are closing stores in near record numbers: Bombay, Levitz, Domain, Tuesday Morning, Cost Plus, Kirkland and Pier 1.

He also points to a struggling Restoration Hardware; Home Depot’s declining earnings, and adds, “home is the weakest area at Macy’s and Target. Everybody’s sick. It’s a gigantic mess, and we’re nowhere near half-way through the housing crisis,” he says. “The value of US homes is down 20% to 25%, which will hold housing down for a long time.”

At the same time, Davidowitz tells GlobeSt.com, “Bed Bath and Beyond is 1,000 times stronger than Linens’ n Things. It’s the 1,000-pound gorilla, and even it is facing trouble for the first time. They’re not making their numbers, but they have no debt,” he points out.

Under such circumstances, he asks, “is there any reason for Linens’ n Things in the marketplace?” He believes the retailer will liquidate, “not instantly,” but he gives it a “50/50 chance for survival.”

New York city-based Apollo Management LP acquired Linens ‘n Things in 2006 for $1.3 billion and took it private. Davidowitz says, “it they can agree on a bankruptcy deal, they may come out and last for awhile.”

The retailer is seeking to file for a “prepackaged” bankruptcy. Under that form, creditors agree on the restructuring plan prior to a chapter 11 filing. The tactic saves on legal fees. General Electric is among the creditors for a reported $700-million line of credit.

Meanwhile, according to published reports that GlobeSt.com could not confirm, Linens ‘n Things is contemplating the sale of its 40 stores in Canada. “They need to raise cash,” Davidowitz notes.

The sole prospective buyer for the units, according to the report in the New York Post, is rival Bed Bath & Beyond. Although it has 971 stores in all, compared with approximately 580 Linens ‘n Things, there is just one Bed Bath & Beyond in Canada.

The Canadian units may appeal to the larger rival, but Davidowitz sees few if any potential buyers for Linens Holdings. One exception may be Apollo, he speculates. “Bankruptcy helps you de-leverage,” he explains. “I think Apollo would like to run it again (with less debt). If it’s not Apollo, I don’t see any other potential buyer.”

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