Claire’s Misses Debt Payment as Lender Balks at Bond Swap

  • Retailer faces default if interest isn’t paid by Oct. 15
  • Chain posts quarterly loss, says credit lines are fully drawn

Claire’s Stores Inc. missed a bond payment deadline, leaving the troubled retailer owned by Apollo Global Management LLC 30 days to avert a default and possible bankruptcy.

The company missed $77 million of interest payments due Sept. 15 on some of its notes after one of Claire’s lenders declined to approve a bond exchange that makes up a key part of the chain’s turnaround plan, according to a regulatory filing. The company has a 30-day grace period to come up with the payment. Claire’s also needs the European lender’s consent to get cash “to fund its near-term debt service and other obligations,” the retailer said.

“Without the exchange, you don’t make the interest payment, and you’re looking at a potential reorganization,” said Charles O’Shea, a credit analyst at Moody’s Investors Service. A bankruptcy could come as early as Oct. 15 if the bond swap isn’t completed, O’Shea said. “That’s the next real red-letter date for these guys, and a filing is certainly a possibility at that point.”

Representatives for Claire’s, based in Hoffman Estates, Illinois, and New York-based Apollo didn’t respond to requests for comment. Claire’s is still paying employees, suppliers and trade creditors, according to the filing.

Debt Loads

Mall retailers and chain stores that sell clothing and shoes are suffering as consumers spend more of their money on their houses, technology and experiences. A slowdown in shopping-center traffic has hastened the bankruptcy of retailers over the past year including Aeropostale Inc. and Pacific Sunwear of California Inc. Other chains, such as J. Crew Group Inc. and Claire’s, have delivered double-digit losses for bondholders.

Claire’s has been saddled by debt it took on in Apollo’s 2007 leveraged buyout. The pending bond exchange would reduce that pressure and give Chief Executive Officer Ron Marshall time to engineer a recovery. The chain suffered as competition from online and specialty stores lured shoppers away, and a rising U.S. dollar crimped overseas sales and profits.

The company also reported fiscal second-quarter results, which showed the net loss widened to $32.1 million from $18.9 million in the same period last year. Consolidated net sales dropped 8.8 percent to $317.2 million and same-store sales were down 5.7 percent.

Holiday Sales

So far in the third quarter, same-store sales are little changed as of Sept. 14, Claire’s said. The dispute with the lender comes during the run-up to Halloween and Christmas, which historically have been among the retailer’s strongest sales drivers.

“The critical thing here, taking the balance sheet off the table, is what’s going on with inventory levels,” O’Shea said. “Are they going to have enough product this holiday to, whatever happens with the balance sheet, be able to make enough money to keep the gas in the engine?”

Adjusted earnings before interest, taxes, depreciation and amortization slid to $37.3 million from $59.9 million in the second quarter. Cash and equivalents stood at $75.3 million as of July 30, and the company was fully drawn on its credit facilities, Claire’s said. Total debt stands at $2.53 billion.

While discussions are continuing with the current lender about refinancing the $50 million European facility and getting the required consents, Claire’s is also talking with “several potential lenders” who might refinance the credit line, according to the filing.

Event of Default

The debt exchange, which covers almost $800 million of existing securities, needs at least $400 million tendered to become effective. Claire’s has said it has commitments from outside investors for $333 million, and affiliated investors including Apollo have agreed to make up any shortfall by exchanging their holdings.

The delayed payments affect Claire’s 6.125 percent senior secured first-lien notes due 2019, the 9 percent senior secured first-lien notes due 2019 and 8.875 percent senior secured second-lien notes due 2019. If payment isn’t made by the end of the 30-day grace period, it would become a formal default that entitles some investors to demand immediate repayment of their holdings, Claire’s said.

“If all this debt becomes due and payable and they don’t have the cash to even service cash interest, that’s certainly not a rosy scenario,” said Anthony Canale, head of high-yield research at Covenant Review.

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