Claire’s Corners Bondholders With $800 Million Debt Swapby and
Apollo-backed company’s proposed exchange sends notes tumbling
‘Bondholders are vulnerable, should they not agree to this’
Claire’s Stores Inc. is turning to its creditors to help it avoid becoming the latest mall chain to succumb to a mountain of debt.
The tween jewelry chain that’s bounced along the bottom of the junk-debt market since its 2007 buyout by Apollo Global Management, is asking bondholders to swap almost $800 million of securities for a smaller amount of new loans. The deal would chip away at the retailer’s almost $2.5 billion debt load and give it more time to boost earnings after it lost more than $500 million in three years as mall traffic declined and competition intensified from online and specialty stores.
Claire’s joins a number of national retailers confronting a wall of debt, including Sports Authority Inc., Aeropostale Inc. and the Fairway Group Holdings Corp. supermarket chain, all three of which filed for bankruptcy this year amid sluggish sales and a shift to e-commerce.
“Bondholders are vulnerable, should they not agree to this,” said Steven Ruggiero, head of research at RW Pressprich & Co. “Apollo has given them an exchange offer that values some of the issues at more than what the notes would be worth in a bankruptcy. They have them over a barrel.”
Representatives for Claire’s and Apollo didn’t immediately respond to requests for comment.
While the swap will cut borrowings and alleviate liquidity stress, bondholders will take a $571 million haircut and the company will still face “acute operational and competitive challenges,” Charlie O’Shea, a senior credit analyst at Moody’s Investors Service, said in a statement Tuesday. Moody’s said Claire’s may have to restructure again, downgrading some of the company’s debt because of the exchange offer.
As part of the deal, Claire’s is offering to exchange $450 million of its 8.875 percent notes due in 2019 for new loans at about 31.6 cents on the dollar if creditors to agree to the swap by Aug. 25, the company said in an Aug. 12 statement. If the investors don’t provide consent by then they have till Sept. 9 to consider the deal, but the swap value will drop to 28.6 cents.
If enough bondholders don’t agree, the parent of Claire’s and funds managed by affiliates of Apollo will do another exchange that will boost their claims on the company’s assets.
“The tender offer is a reasonable outcome for the second lien and unsecured investors and a negative outcome” for first-lien bond holders, Jenna Giannelli, a credit analyst at Citigroup Global Markets, wrote in a note. “The tender does little to solve the underlying capital structure problem and leaves the company still in negative cash flow territory,” Giannelli wrote.
While the plan announced Friday would reduce Claire’s debt load and buy it more time to devise a comeback -- the move sent some of the company’s bonds plunging.
The company’s $1.125 billion of 9 percent first-lien notes maturing 2019 plunged 4.5 cents to trade at 57.5 cents on Monday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Because those bonds aren’t part of the debt exchange, holders would effectively have to share their claims on the company’s assets with investors in the new loan should Claire’s ever file for bankruptcy.
The proposed debt exchange is likely to buy the company a little more time, if it’s successful, Ruggiero said.
“The clock is ticking,” he said. “There’s no doubt.”