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Outlet owner's options shrink


Mired in a near-crippling financial crisis, Baltimore-based Prime Retail Inc. may have few alternatives beyond filing for bankruptcy protection, one analyst said yesterday.

Prime Retail, the world's largest owner and operator of outlet malls, has been battered by heavy losses and debt and last month defaulted on a $20 million loan.

Problems worsened late last week when the real estate investment trust said the planned sale of a 70 percent interest in one of its outlet malls had fallen through. The buyer, Estein and Associates, terminated a contract to buy a 70 percent joint venture interest in Prime Outlets at Hagerstown, one of Prime's newer centers, because the closing did not occur by Aug. 31.

That likely contributed to Prime's announcement, also late last week, that it faces a delay in getting a loan package of up to $110 million from Lehman Bros. Inc., which the company has been counting on to lead it out of the crisis.

"We think the Estein transaction not closing makes the Lehman transaction more difficult to close," said David M. Fick, a managing director of Legg Mason Wood Walker. "There was a significant amount of cash coming out of that that was necessary to pay off obligations currently in default."

Prime officials said yesterday that they continue to work with Lehman Brothers, but that lender diligence is taking longer than expected. Prime also has been unable to get some of its existing lenders to modify the terms of their loans - a necessary step before Lehman will proceed. The Lehman loans were originally expected to close by Sept. 30.

"Everyone here is moving forward, using everything they can to move this as quickly as possible," said Glenn D. Reschke, chief executive officer.

Prime had announced the financing package in June, consisting of a three-year, $90 million loan partially secured by some of Prime's outlet centers, either as mortgages or equity stakes. It also includes a $20 million mortgage on a shopping center the company opened in July in Puerto Rico.

Prime plans to use the net proceeds of the first mortgage on the Puerto Rico center to retire a $20 million loan from FBR Asset Investment Corp., which the company defaulted on Aug. 14.

If it is unable to close the Lehman loans, Prime has said it will consider all alternatives - including seeking bankruptcy protection.

"That's a threat to the lenders - a disclosure to the public - but they're saying to the lenders, 'If you keep pushing us, we're going off the cliff, and you're coming with us,'" Fick said. "This is a tactic in the process of negotiating with other lenders."

Fick said Lehman will not make its loans without some of Prime's other lenders taking a subordinated position to Lehman.

"That's a deal breaker for Lehman," he said, while it will mean a weaker position for other lenders. "Those lenders have to decide, do I want Prime to go bankrupt, or to survive with my position going forward" weaker.

Prime is counting on the Lehman loans to lead it out of financial turmoil marked by $1.3 billion in debt, lower occupancy rates in some of the company's weaker shopping centers and a plummeting share price. Shares of Prime closed up 12.5 cents yesterday at 43.75 cents per share.

But Reschke said yesterday that if the Lehman financing falls through, bankruptcy is just one alternative.

Another would be to convene a conference of lenders to see if they could arrive at an agreement to restructure the debt.

He said though the sale of the interest in the Hagerstown center has fallen through, the center could still be sold to another buyer, and Prime continues to try to market other centers for sale.

Reschke has blamed the troubles on the company's swift growth. Prime merged with Horizon Group in mid-1998 and took on costly ventures, since abandoned, such as starting a chain of retail stores and attempting to start an Internet mall.

In a report yesterday, Standard & Poor's agreed that "overly aggressive strategies by Prime" caused the difficulties. But Prime's financial and operating problems are not endemic to the outlet industry, the report said.

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