May 22 (Bloomberg) -- Valentino Fashion Group SpA, the luxury brand bought at the top of the buyout boom by Permira Advisers LLP, will ask for its loan terms to be loosened after earnings fell, three people familiar with the plans said.

A budget meeting is scheduled for June 8, when Valentino will outline a new business plan to lenders, one of the people said, asking not to be named because the talks aren’t public. The discussions will attempt to raise the ratio of net debt to earnings that would constitute a loan-term breach to a more appropriate level given the recession, the person said.

Valentino Fashion, whose main assets are Germany’s Hugo Boss AG and the couture house founded by namesake Valentino Garavani, has about 2.3 billion euros ($3.2 billion) of debt stemming from Permira’s 5.3 billion-euro leveraged buyout two years ago, the largest ever in the luxury industry. Valentino owes about 1.6 billion euros to banks led by Citigroup Inc., Mediobanca SpA and UniCredit SpA, who were unable to syndicate the debt to other lenders before the financial crisis struck.

“As consumption and sales fall, the high fixed costs these companies have make it more difficult to pay back their debt,” said Armando Branchini, vice president of Intercorporate, a Milan-based luxury-goods consulting firm. “All of those companies that used debt as a tool are suffering.”

Press officers for Valentino, Citigroup, Unicredit, Permira and Mediobanca declined to comment.

Permira’s Forecast

Loan conditions, or covenants, set minimum levels of cash flow and interest coverage, as well as maximum levels of leverage and capital spending. Breaching the ratio of debt to earnings before interest, tax, depreciation and amortization can constitute a default.

Companies from Valentino competitor Prada SpA to DryShips Inc., a Greek commodities carrier, and British chemical maker Ineos Group Holdings have been forced to ask their banks to review loan conditions as demand wanes in the recession.

Rome-based Valentino Fashion said last month that 2008 operating income declined 7 percent to 248.3 million euros from a year earlier. It didn’t provide a year-earlier figure for operating profit, nor any indication of net income.

The luxury company has also suffered from turmoil in the executive suite since its LBO. Head designer Alessandra Facchinetti was dismissed in October, a year after she replaced retired founder Valentino Garavani, while Hugo Boss has had to make payments to ex-chief Bruno Saelzer, who departed in 2008 amid speculation he clashed with Permira.

Both Hugo Boss and Valentino are scaling back store openings to help preserve cash, executives have said. Gianluca Andena, the head of Permira’s Italian unit, said in March he expects Valentino to grow more slowly than originally planned.

Sales in the 175 billion-euro luxury-goods industry may decline at least 10 percent this year, Bain & Co. said in March, downgrading its previous forecast as the recession worsened.

Debt troubles have wiped out returns for some LBO deals, such as Candover Investments Plc’s buyout of yacht maker Ferretti SpA in 2006. The vessel builder’s creditors last month swapped debt for equity after Ferretti missed loan payments.

To contact the reporters on this story: Sara Gay Forden in Milan at sforden@bloomberg.net; John Glover in London at johnglover@bloomberg.net.

Last Updated: May 22, 2009 08:31 EDT