By Natalie Wright and Leela Parker Deo
NEW YORK (Reuters) - 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 percent.
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 the deal.
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 conditions.
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 clothing.
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 same amount.
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 break.
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, sources said.
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 skeptical 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."
(Additional reporting by Michelle Sierra.)
(Editing By Jon Methven and Tessa Walsh)