Sept. 1 (Bloomberg) -- Barneys New York is weighing a debt restructuring or bankruptcy filing that may wrest control from the Dubai government-owned firm that loaded it with debt in a 2007 leveraged buyout, three people briefed on the matter said.

Hedge fund Perry Capital LLC, which helped finance the $942.3 million takeover, has been approached by Holt Renfrew, the Toronto-based department-store chain, about a joint offer for control of the 86-year-old luxury retailer, one of the people said. Holt Renfrew, owned by Canadian billionaire Galen Weston, has stores in cities including Montreal and Vancouver.

Barneys’ debt was cut two grades to three levels above default in July by Moody’s, which cited its “strained financial condition” amid declining sales and “sizeable” debt from the takeover by Istithmar PJSC, a unit of Dubai World. Sales at luxury retailers Barneys, Saks Inc. and Neiman Marcus Group Inc. have tumbled as customers cut spending during the recession.

“The only way they’d survive is with a partner,” said George Whalin, president of Retail Management Consultants in Carlsbad, California. “You’ve got the biggest and the best in the business in Saks and Neiman struggling mightily, and they’re about as good as you can get at it.”

Barneys and its owners are still reviewing their options and haven’t made a final decision, according to the people. Under one scenario, Istithmar would continue providing equity support to the chain, the people said. One of the people said such additional backing from Istithmar was unlikely. The sovereign fund said in April that it provided “significant” additional capital to help Barneys manage costs.

‘Fully Committed’

“Istithmar remains fully committed to Barneys and supportive of its management team,” the firm said in an e- mailed statement. “These are challenging times for retailers, and the company continues to work aggressively to improve its financial position.”

Dubai World, a government-owned investment firm that controls Istithmar and a developer of the manmade palm-shaped islands off the coast of the emirate, has been struggling to raise cash following a property slump. Home prices in Dubai have tumbled by about 50 percent from their peak and may drop another 20 percent this year, Deutsche Bank AG said in June.

Filene’s, Eddie Bauer

Barneys is under pressure to show it can pay financial intermediaries for holiday merchandise from apparel makers, two of the people said. Representatives of Barneys, Holt Renfrew and Perry Capital either declined to comment or weren’t available to comment.

Clothing retailers Filene’s Basement Inc. and Eddie Bauer Holdings Inc. both have sought protection from creditors in U.S. bankruptcy court this year. Both found buyers willing to keep stores open rather than liquidate them.

Founded by Barney Pressman to sell cut-rate men’s suits in 1923, Barneys began building women’s lines in the 1970s. The Pressman family lost control in 1998 and the company exited bankruptcy protection in 1999. Jones Apparel Group Inc. bought Barneys for $294.3 million in 2004 and sold it to Istithmar in September 2007.

Barneys, whose stores stock designers such as Marc Jacobs and Christian Louboutin, operates 13 outlets, 19 lower-priced CO-OP stores and 9 department stores in cities including New York, Seattle, Chicago and Beverly Hills, California, according to the retailer’s Web site.

Maturing Loans

Barneys has $660 million of loans maturing through 2016, according to data compiled by Bloomberg. This includes $280 million of so-called first-lien bank debt and a $180 million unsecured loan that Perry Capital helped finance, the data show. The chain has yet to replace former Chief Executive Officer Howard Socol, who announced his resignation in May 2008. Socol, a former chairman of J. Crew Group Inc., had run Barneys since 2001.

“The issue for Barneys has been the substantial leverage and weak performance,” said David Kuntz, an analyst at Standard & Poor’s in New York. “It’s very difficult to steer a business through troubled times without a CEO.”

Holt Renfrew, which started as a hat shop in Quebec City in 1837, was acquired by Galen Weston in 1986. Weston, 68, is the chairman of publicly held George Weston Ltd., which holds about 62 percent of Loblaw Cos., Canada’s biggest grocery chain.

To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net; Lauren Coleman-Lochner in New York at llochner@bloomberg.net; Haris Anwar in Dubai at Hanwar2@bloomberg.net

Last Updated: September 1, 2009 07:36 EDT