Wherehouse looks for path out of bankruptcy.

Eight months after filing for Chapter 11 bankruptcy protection and shutting most of its 370 stores, Wherehouse Entertainment Inc. is pursuing two different tracks in hopes of emerging from its second bankruptcy in eight years.

The Torrance-based music retailer has put itself up for sale through an auction that was scheduled to occur late last week (Sept. 12). It is also looking to win creditor approval for the plan of reorganization it belatedly submitted to the U.S. Bankruptcy Court in Delaware late last month.

Wherehouse faces challenges on both fronts.

As part of the auction, the retailer is scouring for a buyer that would serve as the "stalking horse"--the necessary opening bidder. But as of the middle of last week, it hadn't yet found one, according to Wherehouse's bankruptcy attorney, Susan Uhland.

With several firms, including Wherehouse and Music Network, having declared bankruptcy within the last few months, there is little appetite for acquiring record stores.

In one recent deal, electronics retailer Best Buy Co. sold its Musicland chain to Boca Raton, Fla. investment firm Sun Capital Partnet's Inc., for the assumption of its debt.

And for the past four months, L.A.-based investment bank Greif & Co. has been shopping rival Tower Records chain for its parent, MTS Inc.

Meanwhile, the reorganization plan is contingent on Wherehouse securing favorable financing terms from vendors in order to continue operations and build inventories for the upcoming holiday season.

It has said in court filings it will need vendors to grant credit terms allowing it to repay them within 75 days versus the standard 60-day period.

The company is still trying to line up lenders to provide a package that would help repay debtor-in-possession financing from Wachovia Corp.'s Congress Financial division, said Uhland.

In its filing, Wherehouse said it would issue $33.8 million in convertible notes to a group of secured creditors who are owed $45 million, including the music divisions of AOL Time Warner Inc., Sony Corp. and Vivendi Universal SA

Another $1.2 million in convertible notes would be issued to "qualified" unsecured creditors, who are owed $102 million by the company. Those creditors would receive 11 cents on the dollar.

If Wherehouse were to succeed in a postbankruptcy turnaround, the notes would be convertible into a 95 percent equity stake in the company, according to the filing.

The company, which filed for Chapter 11 reorganization in January, originally had been scheduled to present its reorganization plan on June 30, but ended up filing two months later after winning an extension from the court. Under the current timeframe, creditors have until November to approve the plan.