Wherehouse to seek debt-equity swap.

Wherehouse Entertainment Inc., seeking a game plan to stay clear of bankruptcy court, is developing a restructuring proposal involving a debt-equity swap it hopes will satisfy creditors and reduce its debt-service load.

The company is over-leveraged, said Jerry Goldress, chairman and CEO of the Torrance-based company. "We need to restructure our debt."

Meanwhile, "we have enough cash flow to meet all of our normal demands, and we're current with everybody," he said.

The music and video retailer operates 347 stores in 11 states. The bulk of its stores are located in Southern California. It has $207 million in debt.

Wherehouse was a publicly traded company until Adler & Shaykin, a New York-based leverage buyout firm, took it private in an LBO in 1988. Four years later Adler & Shaykin sold the company, in another leveraged buyout, to a subsidiary of New York-based Merrill Lynch.

Now the retailer has found itself in trouble because the music business has become increasingly competitive and new releases have declined lately. Thus, its lenders - concerned about whether the company could meet all of its original debt service and debt pay-down goals set forth back in 1992 - required Wherehouse to make its best effort to begin to formulate a capital restructuring plan by June 10, he said.

Out-of-court overhaul

Wherehouse is trying to develop an out-of-court restructuring plan that involves swapping its $110 million worth of subordinated bonds for common stock, Goldress said.

The company is currently paying $14.3 million a year in interest on those bonds, and a swap would eliminate those payments, he said.

Thus, Wherehouse would have much more money with which to service its debt and buy product, or have more cash in general, Goldress said. Wherehouse's total cash interest payment on its debt, including the interest on its bonds, was $21 million in fiscal 1995 ended Jan. 30, added Vice President and Chief Financial Officer Kathy Ford.

The bondholders recently formed a committee, and have hired attorneys and a financial adviser to represent them, Goldress said. "We are in active negotiations with them," he said.

"There's too much leverage on this company," said Russell Belinsky, the bondholders' financial adviser. He is with the West L.A.-based specialty investment banking firm Chanin & Co.

Improvements needed

Wherehouse needs to "work out a better capital structure," but Belinsky said he is not yet sure what that will entail.

There isn't much Wherehouse can give its bondholders other than direct ownership in the company, said an analyst who wished to remain anonymous.

The common stock that would be issued in the swap might eventually become publicly traded, but probably not right away, Goldress added.

Furthermore, there will likely be more to the restructuring plan than the debt-equity swap, but those details have not yet been worked out, he said.

Goldress added he thinks Wherehouse will end up negotiating a satisfactory solution with its senior lenders, bondholders and equity holders.

In an out-of-court restructuring, negotiations can get rough, said the anonymous analyst. When companies put together a restructuring plan while in Chapter 11, the bankruptcy judge and rules usually prod the parties into a consensus eventually, the analyst said.