Loehmann's, the US retailer owned by Istithmar World, filed for bankruptcy just weeks after executives from the Dubai World unit flew to New York on a rescue mission.
The New York discounted designer goods chain is among a long list of purchases made by Istithmar during the boom years, including the luxury US retailer Barneys New York and the Queen Elizabeth 2 cruise liner. Some of Istithmar's investments have soured during the global recession.
"There's a repricing of some of the assets in Istithmar's portfolio bought at the peak of the market as they have not performed as well as the company had hoped," said Rachel Ziemba, a senior analyst covering sovereign wealth at Roubini Global Economics.
"Chapter 11 will ensure restructuring happens in an orderly manner and should avoid a free-for-all among creditors."
Loehmann's Holdings restructuring is the latest development in a string of debt refinancings to affect some Dubai Government-related entities. Dubai World, a conglomerate with interests from ports to property, last month finalised a US$24.9 billion (Dh91.45bn) debt restructuring with its creditors.
Problems for Loehmann's started after demand for its goods waned as US consumers cut back on spending. It filed for its second bankruptcy in 11 years after failing to exchange $110 million of senior notes, according to a filing with the US bankruptcy court in Manhattan.
Under US law, companies unable to repay debts can apply for Chapter 11 protection, a form of bankruptcy that involves the reorganisation of a debtor's financial affairs and assets. The law is intended to offer the debtor a fresh start.
Loehmann's agreed to the bankruptcy filing with "key supporting secured noteholders" and Istithmar, according to court papers.
Istithmar, along with Whippoorwill Associates, an agent for the retailer's discretionary funds and accounts, has agreed to invest an aggregate amount of $25m in Loehmann's subject to certain conditions after its emergence from Chapter 11. The investment would be in the form of a convertible preferred equity stake, according to the retailer.
"We look forward to working constructively through this process and achieving a consensual restructuring," said Andy Watson, the acting chief executive of Istithmar World.
In 2006 Istithmar purchased an 88 per cent stake from Arcapita, a Bahraini investment company, for about $264m.
Founded as a one-store operation in 1921 by Frieda Loehmann, the retailer passed through numerous hands in the 1980s and 1990s before going bankrupt as the decade ended.
A team of advisers led by Dr Shuja Ali, Istithmar's head of portfolio management, visited New York this month to try to sign a deal with Loehmann's bondholders to delay repayment of debts that become due next year.
While it has sold many of its New York assets, Istithmar still owns a building at 450 Lexington Avenue, the Mandarin Oriental hotel at Columbus Circle and Barneys, among other investments.
Loehmann's previously filed for bankruptcy in May 1999 because of growing competition from discount chains. It emerged from bankruptcy the following year after cutting more than $140m in debt and closing 25 stores.