Circuit City Files for Chapter 11 Bankruptcy

Circuit City Stores, the No. 2 U.S. consumer electronics retailer, filed for bankruptcy protection Monday just a few weeks before the start of the key holiday shopping season, becoming the largest retailer to file under Chapter 11 this year.

Circuit City fell victim to tighter credit terms from vendors and a loss of market share to Best Buy , Wal-Mart Stores and other rivals. (See Scott Cohn's report on Circuit City, left.)

The retailer and 17 affiliates filed for Chapter 11 protection from creditors with the U.S. bankruptcy court in Richmond, Virginia, where it is based.

Circuit City filed one week after saying it would close 155 stores, or more than one-fifth of its retail base, and eliminate 17 percent of its U.S. workforce.

It also said it was considering all options to restructure.

In a court filing Monday, Chief Financial Officer Bruce Besanko said the retailer filed for Chapter 11 in order to continue its turnaround efforts.

"In large part, a Chapter 11 filing is due to three factors, all of which contributed to a liquidity crisis that prevented the company from completing its turnaround goals outside of formal proceedings: erosion of vendor confidence, decreased liquidity and a global economic crisis," Besanko said.

Pinched Suppliers

Circuit City had lost money in five of the last six quarters.

In recent weeks, suppliers pinched by the global credit crunch have tightened terms, sometimes requiring up-front payments before shipping goods.

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Larger rival Best Buy, which is based in Minneapolis, has said it might take over stores that distressed rivals close.

Yet a flood of discounted merchandise from liquidating Circuit City stores could hurt Best Buy during this holiday shopping season, said Jefferies & Co analyst Dan Binder.

Steve Helber / AP A Circuit City store in Richmond, Virginia.

"Longer term, you've got Best Buy, who's dominant in the sector, taking share. But in the short run it could feel the pain of the liquidation activity," Binder said.

"There's already soft demand out there and probably too much supply. This exacerbates the situation," he added.

According to the filing, Circuit City had $3.4 billion of assets and $2.32 billion of debt as of Aug. 31, and more than 100,000 creditors.

The company has arranged a commitment for debtor-in-possession financing of $1.1 billion, which will allow it to continue to operate during the bankruptcy proceeding.

Among the company's largest unsecured creditors are Hewlett-Packard , Samsung Electronics and Sony , the filing shows.

The largest shareholders include HBK Master Fund and First Pacific Advisors, according to the filing.

Shares of Circuit City last traded Friday at 25 cents, New York Stock Exchange data shows.

They fell to 13 cents in premarket trading.

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