Credit Card Shortfall Forces $3B Spiegel Inc. To File for Bankruptcy.

Byline: Vicki M. Young with contributions from David Moin NEW YORK - Spiegel Inc. on Monday succumbed to its credit crunch, filing for Chapter 11 bankruptcy court protection in Manhattan.

The owner of the Spiegel catalog and Eddie Bauer specialty chain had been under increasing pressure in the past month due to the inability of its credit card operation to meet established financial criteria. This failure meant not only that its customers could no longer use its third-party credit cards to shop for Spiegel or Bauer merchandise, but also that excess cash flow would be directed back to noteholders.

The redirection of cash to investors was triggered by an early amortization or payout event on March 11. In practical terms, cash from operations could no longer be used to fund operations.

Four days earlier, Spiegel's special-purpose bank subsidiary First Consumers National Bank discontinued charging privileges on all of its MasterCard and Visa accounts. FCNB also has discontinued reimbursing Eddie Bauer, Spiegel Catalog and Newport News for charges made with the private label credit cards it issued to the Spiegel-owned firms.

Dependency on finance revenues from a credit card operation can be profitable but also fraught with risks. Recently, Sears, Target and Kohl's have had to address questions from Wall Street regarding their card portfolio risks and delinquencies contributed to Federated Department Stores' disposal of Fingerhut and Sears' recent stock declines.

The Chapter 11 filing stops payments on the required payouts in connection with the notes. A $400 million debtor-in-possession financing facility - $150 million is expected to be approved shortly for interim use, with the full …