FAO’s Future in Doubt After Financing Loss

Add FAO Inc. to the list of big-name direct marketers facing an uncertain future.

The King of Prussia, PA-based company may face liquidation as it announced yesterday that “unexpected complications” in completing exit funding for its planned emergence from bankruptcy led the purchasers of $30 million in equity financing to withdraw.

Successful completion of the funding is a condition of its scheduled emergence from bankruptcy April 18, the day when the company's right to use cash that is collateral for the loans it owes to its lenders expires, unless extended by the lenders.

Alternatives being explored include obtaining replacement equity funding to complete its confirmed plan, a sale of all or part of its operations and liquidation.

“There was a difference in the final terms between our equity investors and our bank lenders, and, as a result, the equity financing was withdrawn,” company spokesman Alan Marcus said. “At this point we're hopeful that there will not be a need to liquidate operations [but] it is a possibility.”

He said “it's too soon to tell” about the effect on catalog and e-commerce operations.

U.S. Bankruptcy Court for the District of Delaware approved its reorganization plan April 4, allowing the company to emerge from Chapter 11 and start making distributions to creditors, pursuant to the terms of the plan that was to become effective Friday.

FAO received a commitment for up to $77 million in financing to fund operations once the plan took effect. The financing includes a $67 million revolving credit facility provided by a group of banks led by Fleet Retail Finance Inc., and a $10 million term loan by Back Bay Capital Funding LLC.

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