Flat Junk Market Mutes Fizz for Club That Attracts the Beckhamsby
Soho House scraps refinancing plan as borrowing costs rise
China headwinds damp investor demand for high-yield sales
A celebrity hangout’s aborted bid to refinance its debts highlights the slump in demand for junk bonds that has driven borrowing costs to an 11-month high.
Soho House, the operator of private members clubs that has counted David and Victoria Beckham as well as actor Benedict Cumberbatch among its gilded patrons, scrapped a 200-million pound ($304 million) financing deal to replace older debt last week due to market conditions. The proposal had coincided with plans to expand the company’s global empire of clubs, restaurants and bars, according to Standard & Poor’s.
The deal foundered in a junk market that has seen borrowing costs rise to the highest since October as headwinds from China damp investor appetite for riskier assets. Even a small offering such as Soho House’s in a growing hospitality industry couldn’t buck a market that has seen bond sales this year drop 20 percent to $347 billion, according to data compiled by Bloomberg.
“Trying to bring that type of deal into a volatile market was deemed to be not working at the right terms,’’ said Fraser Lundie, co-head of credit at Hermes Investment Management in London, which oversees $44.5 billion. “It was a small deal, from a growth-dependent company that’s going to be running with very limited free cash for the foreseeable future.”
London-based Soho House, which opened its doors to the well-heeled two decades ago in London, had planned to replace 145 million pounds of 9.125 percent debt due in 2018 with bonds carrying a lower interest rate. It canceled the redemption after failing to meet the conditions for the transaction, it said in a Sept. 25 statement.
A spokesman for Soho House couldn’t immediately comment on the abandoned sale or expansion plans when contacted by e-mail.
The deal, which also sought to arrange a new line of credit, in effect would have increased the company’s debt level by 55 million pounds, according to Standard & Poor’s.
Investors demand an average 6 percent to hold sterling denominated, sub-investment grade debt, up from this year’s low of 4.9 percent set in June, according to Bank of America Merrill Lynch data. Soho House is rated B- by Standard & Poor’s, its sixth-highest junk rating. Moody’s assigns the club operator its seventh-highest junk ranking, at Caa1.
The company plans to open about six new venues including in New York and Amsterdam, and as many as 30 new and joint-venture restaurants in the next two years, according to the ratings agencies. It’s already opened new clubs in Oxfordshire, London, Chicago, as well as Istanbul, where the venue is located in a 19th-century palazzo with a rooftop cocktail pool.
The bond deal, if it had gone through, would have raised the company’s debt level to more than eight times adjusted earnings before interest, taxes, depreciation and amortization, from 7.3 times, and the company will remain cash-flow negative over the next two years, Moody’s cautioned in a Sept. 21 report.
Soho House may face a downgrade if the group does not “meaningfully improve its cash generation and interest coverage,” Standard & Poor’s said before the proposal was canceled. The business benefits from its strong brand and membership base, which targets professionals in the creative industries, the ratings agencies said.
“It’s a decent business, but it’s got quite a lot of debt for the credit profile,” Anthony Robertson, head of global leveraged finance at BlueBay Asset Management in London, which oversees about $66 billion, said on Sept. 24 when the bond sale was withdrawn. “Against the backdrop of markets suddenly much weaker in the last few days, the type of transaction which is small in nature and in sterling is not going to get a lot of traction.”
Soho House’s expansion comes at a time when more people in the U.K. are eating and drinking out more often, according to Simon Stenning, executive director at M&C Allegra, a provider of intelligence for the hospitality trade. The industry will grow 2.8 percent to about 85 billion pounds this year, compared with growth of 2.4 percent last year, he said.
“We’re predicting further growth,” Stenning said. “We’re seeing consumers eating out is habitual and will continue to rise.”