Diamonds
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Fabrikant files voluntary petitions for Chapter 11 bankruptcy
November 20, 2006
New York—M. Fabrikant and Sons Inc. and its domestic subsidiary Fabrikant-Leer International Ltd. have filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code.
The filing, in the U.S. Bankruptcy Court of the Southern District of New York, took place on Nov. 17, according to court documents obtained by National Jeweler.
According to the papers, numerous factors contributed to the company's action.
"In general, the commencement of these chapter 11 cases was due to several converging events which occurred over the course of the past two years that severely impacted the business and operations of the Debtors," the court document states. "These include the bankruptcies of two of its larger retail customers that led to substantial write-offs and reduced cash flow; the financial restructuring of a third significant customer that required the long-term deferral of a substantial portion of the then-current receivables; the implementation by one of its most significant customers of poorly performing initiatives to source diamonds and jewelry directly overseas, thereby eliminating purchases from the Debtors; and an unfavorable interest-rate swap, which led to significant cash losses."
Also cited are lower margins related to the increase in gold prices and diminished free cash flow because of competition and pressure from low-cost jewelry manufacturers.
As a result, lenders imposed constraints on Fabrikant's liquidity, which further limited the companies purchasing capability and resulted in reduced sales revenue.
Fabrikant's foreign and domestic affiliates were not included in the filing.
The company said in a statement that it expects to continue to operate its business and expects a smooth transition into Chapter 11, with all of its facilities expected to remain open on normal schedules.
The company noted that it has negotiated financing agreements with its senior secured lenders, which remain subject to court approval. It said that under the Chapter 11 process, it would be able to continue paying employee wages and benefits, honor customer fulfillment obligations and programs, and make uninterrupted payments to suppliers for goods and services.
In addition, the company said it will continue to actively pursue strategic alternatives, including the sale or refinancing of the firm.
"Fabrikant believes that its Chapter 11 proceedings currently provide the best opportunity to maximize the value of its assets and its business for all stakeholders," the company stated.
The New York-based company—established in 1895—is one of the largest manufacturers and distributors of diamonds and an industry leader.
The move follows a series of earlier steps taken by the company, including the April 2005 transition of substantially all of its jewelry business to Fabrikant-Leer International to consolidate its similar businesses. When faced with a lack of liquidity earlier this year, the company was approached by India-based jewelry manufacturer Tara Group to assume existing and future purchase orders. As a result of this offer, Tara Jewels Holdings Inc. and Fabrikant formed Fabrikant-Tara International.
According to court documents at the time, the move enabled Fabrikant to stay in business.
Attorney Michel H. Perkiel of Troutman Sanders LLP said the Chapter 11 process will allow the company to pursue different options it has been considering—or others that may come into play.
"There have been a number of parties who have expressed various types and levels of interest as to various alternatives, and we plan to pursue each and every one of them," he told National Jeweler. "In the meantime, we'll be reposed in Chapter 11 with the various protections that it affords and try to maintain levels of stability and normalcy."
One way in which the company is now protected is in relation to lawsuits that had been filed against it in August by two Mumbai, India-based companies seeking more than $7.5 million in unpaid invoices.
"Under the bankruptcy laws, those actions are no longer permitted to be prosecuted or pursued," Perkiel said. "They are subject to the automatic stay of the bankruptcy code. One of the few benefits of Chapter 11 is that you don't have to litigate with everyone on multiple fronts."
While the sale of the company or parts of it are among the possible options, he said ultimately the ambition is to sustain the Fabrikant name with its historical role in the diamond and jewelry industry. However, that could occur under a new regime.
At press time, messages were left with company representatives for comment but had yet to be returned.
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Diamonds
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