A big corporate bankruptcy has so much pushing and shoving that watching one unfold is a little like watching a high school hockey team try to share a pizza.

But the one party that seemed to get what it wanted out of the bankruptcy of the parent of Herberger’s department stores is a group that pushed hard for liquidation, the group that called itself the Second Lien Noteholders.

These are not easy people to cheer for, distressed debt investors that include the hedge fund manager now slashing jobs at newspapers across the country. What they wanted all along, a quick liquidation, has real-world consequences, too, including empty stores in the heart of some downtowns and the loss of more than 20,000 jobs.

It’s galling to have to admit they were almost certainly right.

More than a dozen Herberger’s stores in the state are now running their going-out-of-business sales, as are the two Younkers stores here and the rest of the stores of the Bon-Ton chain across 23 states. Everything must go, and that means everything.

This will end a long tradition in the region for Herberger’s, an upscale alternative to stores like J.C. Penney in many communities. It’s been part of Bon-Ton for more than 10 years but, until 1997, it had been an independent, Minnesota-based company for seven decades. Its passing will leave a big hole in cities across the state.

Here’s the way a headline in the Free Press of Mankato put it as the liquidation news spread: “Closing of Herberger’s hits New Ulm particularly hard.”

Bon-Ton, based in Pennsylvania but with many headquarters operations in Milwaukee, filed for bankruptcy protection the first week of February. That day was a long time coming.

Bon-Ton certainly had a problem of too much debt. As of its last quarterly filing last fall, Bon-Ton had a negative net worth and what was keeping it alive was a loan that had been amended repeatedly. Unfortunately, the company had strategic and operating problems at least as bad and its financial one.

In all but a few of its quarters in recent years, its sales at stores open at least a year had declined. Its quarterly announcement last fall was particularly grim, with a same-store sales decline of almost 7 percent and a whopping net loss. The critical holiday selling season went better, but it was still another period of declining same-store sales.

By Christmas, the company had already skipped a $14 million interest payment on the $350 million second lien notes it had outstanding. Meanwhile, the owners of these notes had already decided the company was obviously dying and the only thing to do was sell everything off as quickly as possible.

That’s the story told by documents in the bankruptcy files, including objections filed by the informal group that owned most of second lien notes. The term second lien here means they had a security interest in the assets and stood in line ahead of unsecured creditors in the event of a liquidation, but they also stood in line behind another lender.

A group of these noteholders had been talking before the bankruptcy filing with the management team under a confidentiality agreement, and they had at least once insisted that management admit the obvious and just liquidate the company.

Instead, in January they agreed to let Bon-Ton executives try to find a big investor willing to keep the company going. If that kind of investor materialized, the noteholders would convert some of their debt into ownership in the business and maybe invest additional money, relieving even more financial pressure.

That effort turned up no one, about the same result as the company’s recent efforts to find a buyer for the whole company.

Of the 38 parties reached by Bon-Ton’s investment banker to consider an acquisition, only a handful took a closer look at the finances and operations and none was willing to make even a nonbinding proposal.

No corporate savior appeared to be coming.

That’s why the noteholders objected to all sorts of payments the company wanted to make after the bankruptcy filing. It’s certainly true suppliers would stop shipping products without being paid, but that’s exactly the point of their argument in favor of a liquidation. Don’t let that money leave the checking account, it’s never going to be replaced.

These investors initially lost the argument, and the company was given more time, this time protected by the bankruptcy court. There appeared at the end to be a proposal to keep the company going, from investors that included two shopping mall owners eager to keep a tenant alive. There was one problem, though, and that’s that they needed up to $500,000 for a “work fee” to do their homework before committing.

The noteholders reacted as you would expect. Not only was shutting down still a better deal for people owed money by Bon-Ton, they argued, but now creditors were expected to help pay for another group’s due diligence? If they needed their costs covered, how serious could they be?

The judge denied the fee request, and, in the end, the noteholders ended up as part of the winning bid to acquire Bon-Ton’s assets to then liquidate them. Within days, the company announced, the going-out-of-business sales would get underway. If all goes according to plan, this will all be wrapped up this summer.

There’s a case to be made here that the system worked, that the company had its shot at finding a buyer to keep it going before the court pushed ahead to preserve some asset value for creditors. Yet, obviously no one emerged from this bankruptcy having really won anything.

As in other big bankruptcies, the company has a website for its bankruptcy and financial restructuring. It has a matter-of-fact and helpful tone, with just a hint of melancholy in the last line on the home page.

“On behalf of all of us,” it reads, “thank you for your support and business.”


lee.schafer@startribune.com 612-673-4302