Court Records Reveal Fabrikant’s Creditors

Details about the problems that led to M. Fabrikant & Sons downfall are slowly being revealed, as are some the leading creditors of the veteran diamond company, which filed for Chapter 11 bankruptcy protection last week.

A report appearing in the Indian financial newspaper Economic Times, estimates Fabrikant’s polished diamond purchases at $60 million a year, making it the largest foreign diamond buyer in the country.

Sanjay Kothari, chairman of the Indian umbrella organization GJEPC (Gem and Jewellery Export Promotion Council), told the newspaper he estimates Fabrikant’s debts to Indian firms at close to $25 million.

The company's greatest undoing was the failures of two of its biggest clients, Crescent Jewelers and Friedman's. According to Fabrikant's court submissions to the U.S. Bankruptcy Court for the Southern District of New York in Manhattan, it was Friedman's largest unsecured creditor with outstanding debts of $17.02 million. The bankruptcies of these two clients led to “substantial” write-offs, according to the court filing.

Financial woes of another client, major U.S. retailer Whitehall Jewelers, added another strain to Fabrikant’s finances. Other problems included a key client that turned to other sources of diamonds and jewelry, rising gold prices, and reduced purchases by the number one U.S. jewelry seller Wal-Mart.

These factors led to a loss of $12.6 million on sales of $370 million. Adding to its hardship, banks lending money to Fabrikant reportedly raised interest rates to “unfavorable” levels in response to the loss, setting tougher borrowing rules. The firm said it owes the banks $161.9 million.

Of this sum, $13.85 million is an unsecured debt to ABN Amro, $8.8 million is owed to Antwerpse Diamantbank, and $7.87 million to the Union Bank of Israel. Other banks on the list are Bank of America, HSBC Bank USA, Israel Discount Bank, J.P. Morgan Chase & Co., and Sovereign Bank.

Two Indian diamond firms, H. Dipak & Co. and Blue Star are owed $5.67 million, and $5.55 million respectively. Fabrikant owes $36 million to non-banking creditors and $124 million to its non-bankrupt subsidiaries, including Fabrikant-Tara International, court records show.

Court records also indicate that in October Fabrikant received two offers to buy its bank debt and an offer to buy several of its subsidiaries. All were turned down by the lenders.

When the banks eventually stopped backing the company, Fabrikant turned to bankruptcy protection.