As it turned out, Linens 'n Things Inc. did not have the right stuff. The home retailer owned by Apollo Management LP was the first big leveraged buyout to sink, dragged by staggering debt as the economy entered the worst recession in the U.S. since the 1930s.

Apollo purchased Linens for $1.3 billion in February 2006 during the height of the buyout boom, betting that it could turn the languishing home furnishings chain around with the help of retail veteran Robert DiNicola as chairman and CEO. DiNicola had led fine jewelry store Zale Corp.'s post-bankruptcy turnaround, but his efforts at Linens could not keep the company from folding in a major housing slump caused by the implosion of subprime mortgage loans.

"After two years of heavy lifting," the company has made operational progress, DiNicola said in an earnings call in March 2008. But, he added, "we recognize that the financial side of our business has been sorely deficient."

While the Clifton, N.J., company had $2.8 billion of annual sales, profit was sagging and its debt -- $856 million long-term at the end of 2007 -- was increasingly difficult to manage. In April, it said it would postpone interest payments on its senior notes as problems accelerated with vendors, and consumer spending continued to tighten. On May 2, Linens filed Chapter 11.

The business model of the No. 2 household retailer was broken, unable to withstand the confluence of forces pulling it apart. In addition to a worsening economy and deteriorating credit markets, the company faced stiff competition. It continually lagged behind top industry player Bed Bath & Beyond Inc., but also had to contend with the home furnishings departments of Macy's Inc., J.C. Penney Co., Target Corp. and Wal-Mart Stores Inc.

From the beginning, the buyout looked shaky. The company's earnings had been declining despite aggressive territorial expansion, and the merger agreement contained several performance hurdles that gave lenders an out. For instance, Bear, Stearns & Co. and UBS Securities LLC had committed financing provided that Linens generate at least $140 million of Ebitda in fiscal 2005. The deal got done, but in 2007 the company booked $26.2 million of negative adjusted Ebitda, plummeting from positive $61.6 million in 2006.

Before going under, Linens had a sprawling business that employed 17,500 people and operated 589 retail stores in 47 states and seven Canadian provinces. Around 18% of its stores were in Florida and California, areas pummeled by the housing crisis.

Also, unlike similarly troubled retailers that private equity firms had bought, Linens didn't own real estate. It leased its stores, paying $250 million a year in rent before being bought. The only piece of real property it owned at the time of the take-private was a distribution center in Greensboro, N.C. By contrast, the $7 billion take-private in 2005 of Toys 'R' Us Inc. -- by Kohlberg Kravis Roberts & Co., Bain Capital LLC and Vornado Realty Trust -- was predicated on the untapped value of the retailer's real estate.

As Linens worked to regain its footing by restructuring its balance sheet, speculation arose that Apollo was buying up Linens paper in the secondary market ostensibly to strengthen its hand in negotiations with lenders. Apollo declined to comment, but sources familiar with the company's efforts say Apollo did not invest in Linens' debt.

Linens had hoped to surface from bankruptcy intact, but a lack of consensus among its creditors forced it to abandon its plan to reorganize around fewer stores. While it had the support of its debtor-in-possession lender, General Electric Capital Corp., the retailer failed to win over the noteholders in the reorganization and submitted its liquidation plan on Dec. 5.

In the end, Apollo and co-sponsors National Realty & Development Corp. and Silver Point Capital LP saw their $648 million equity investment in the company vanish.

Linens was the first major LBO'd retailer to go bust, but it probably won't be the last. Several others are under scrutiny for signs of distress. They include Claire's Stores Inc., a seller of inexpensive jewelry and accessories for girls and young women that Apollo bought for $3.1 billion in 2007.

What's saving many of these highly leveraged retailers from Linens' fate are covenant-lite debt structures completed during the buyout boom years. But how much longer they can hold out in this economy is anyone's guess.