| NEW YORK, March 7
NEW YORK, March 7 Red-hot institutional demand
for U.S. leveraged loans has produced a string of aggressive
deals for fashion retail companies, including an aggressive
buyout financing backing private equity firm Sycamore Partners'
takeover of The Jones Group apparel company.
The aggressive deal allowed Sycamore to slash its equity
contribution in half and add $300 million in unsecured term debt
to the financing package for the Nine West unit, which cut the
private equity firm's equity contribution to less than 9.2
Equity checks for LBOs typically average 20-30 percent, with
some as high as 30-35 percent. Only two buyouts have been
completed since the financial crisis with equity checks lower
than 20 percent, the buyout of BMC Software in August 2013 and
vegetable and fruit producer Dole Foods in October 2013.
"The market didn't love it, but the market is so strong that
they were able to do so," said a banker of the Nine West part of
Retail is traditionally a hard sector to bank as it is
closely linked to the economy and consumers' discretionary
spending. The appearance of several aggressive retail deals in
the leveraged loan market is testimony to robust market
At least 10 other apparel companies have tapped the U.S.
leveraged loan market recently to take advantage of low interest
rates, pay large dividends to their private equity owners and
absorb pent-up demand for new M&A deals, sources said.
More than $5 billion of retail loans has been sold to
institutional investors in 2014 so far, which is nearly equal to
the total volume of loans signed by retail companies in 2013,
LPC data shows.
U.S. retail sales slowed in January due to unusually cold
weather in the U.S. and consumers' preference for high-ticket
items, such as automobiles and home improvements rather than
But despite lingering concerns about the U.S. economy,
investors are discounting retail risk and warming to the
industry due to a lack of lending opportunities in other less
cyclical industries which is allowing retailers to sign up loans
on favorable terms.
M&A on tap
Sycamore is restructuring The Jones Group to operate the
businesses separately. The sponsor is splitting the company
before potentially selling some brands, including high end shoe
designer Stuart Weitzman, by raising debt at separate divisions
in carve-out transactions.
Sycamore added an initial $250 million unsecured term loan
to Nine West, which will be the surviving company when the
buyouts and carve-outs are completed, and cut its equity by the
Although the move pushed leverage up to 6.1 times
debt-to-adjusted Ebitda, no investors dropped out of the deal,
which allowed Sycamore to reduce the equity again in exchange
for more unsecured debt.
Pricing on Nine West's $445 million first-lien term loan
settled at 375bp over Libor at the wide end of guidance of
350-375bp over Libor. The increased $300 million unsecured term
loan was priced at 525bp over Libor and traded strongly on the
Stuart Weitzman's term loan was also increased by US$30
million and the equity was reduced by the same amount. Despite a
price cut to 350bp over Libor from 400bp over Libor, appetite
for Stuart loans were equally strong after their trading debut,
Bauer Performance Sports, which makes ice hockey, roller
hockey, lacrosse, baseball and softball sports equipment and
related clothing is also planning a new $650 million credit to
fund its acquisition of the Easton Baseball/Softball business
and to refinance existing debt.
"If you're looking at M&A, the ability to finance the
transaction at a low interest rate is helpful for the economics
of the buyer and that holds true for private equity (firms) like
Sycamore taking Jones private, or Bauer," said Scott Tuhy, vice
president at Moody's Investors Service.
In addition to M&A, retailers are jumping in with
opportunistic refinancings and recapitalizations to cut
borrowing costs, reduce interest payments or pay dividends to
shareholders. Clothier J. Crew Group is refinancing an existing
term loan B and senior unsecured notes with lower-cost bank
debt. PVH Corp, the owner of Calvin Klein and Tommy Hilfiger, is
also raising loans to refinance debt and cut interest costs.
Several apparel companies have launched aggressive dividend
recapitalizations. Casual clothing retailer Lands' End launched
a $515 million term loan to fund a $500 million dividend to
parent Sears Holdings, before its eventual spinoff as a public
company to Sears shareholders.
Women's apparel name Talbots, shoe retailer Payless, and
plus size clothing company OneStopPlus are also in the market
with leveraged loans to fund dividend payments.
As fashion retailers companies operate in a low-growth
sector, many are targeting M&A and international expansion for
growth and are looking for greater flexibility in their
financings to accommodate bolt-on acquisitions.
"Apparel companies are operating in a mature segment.
Consolidation is one way to gain efficiencies, and apparel
distribution is a place where scale matters," Tuhy said.
"If you look at the PVH/Warnaco transaction, Warnaco had a
larger international distribution network than PVH had, so being
able to tap into overseas growth wasn't the only factor - but
that was a factor."
Fashion risk posed problems for denim company True Religion
and specialty retailer rue21 last year, which were forced to
sweeten pricing to get deals past sceptical investors.
Fashion risk can be mitigated by strong brand names or
diversification among brands and online and international
presence, Tuhy noted.
J. Crew reported improved operating performance in recent
quarters given strong sales results, cost controls and a
successful online presence.
"J. Crew has one of the strongest management teams in the
business," Tuhy said. "They haven't performed well just for one
quarter, they've done it for a number of years. I think they
have figured out the secret sauce."