“A jolt to the market could come from a well-known name in the retail sector facing difficulties. This could lead to a default which could impact the market. There are a large number of credit funds in, for example, New Look. A company like this defaulting would have a big impact. There are handful of names where if they do hit a wall, people are stuck – they can’t get out.”
When Jeremy Ghose, managing director at Investcorp Credit Management, made this observation to Euromoney in February 2018, the market was still digesting the fallout from the Steinhoff fraud scandal that had engulfed the margin lending business of several large US lenders.
He spoke as part of a story examining the impact that years of easy corporate credit might have when the cycle turned.
Now, nearly one year later, New Look has announced a debt-for-equity conversion that will result in bondholders holding over 90% of the equity in the company and reduce existing debt from around £1.35 billion to roughly £350 million.
Under the proposal, which was announced on January 14, existing senior secured notes will be exchanged for £250 million of new bonds with a 2024 maturity that pay 8% interest a year.
Around £150 million of new money bonds will also be issued on the same terms, along with an £80 million bridge deal.
A collapse in operating leverage can suck financial flexibility out of a struggling business very quickly- CreditSights
New Look will be permitted to toggle between cash and payment-in-kind (PIK) interest on all the bonds, with the latter coming at an additional 4%.
The firm has £700 million of 6.5% notes due 2022 outstanding, along with £364 million of 4.5% bonds also due in 2022.
The 6.5% 2022 bonds were trading at 36.91% on January 15, down from 42.5% before the announcement of the debt-for-equity swap. The 4.5% bonds fell from 42% to 29.5%.
New Look is owned by South African investment firm Brait Investments, of which Steinhoff’s Christo Wiese is a non-executive director. Brait’s shares fell by 24% to a seven-year low of R24.06 ($1.76) after the deal was announced.
New Look’s debt pile, built up under previous owners Apax Partners and Permira, was last restructured in 2015 when Brait bought the company, which was then valued at £1.9 billion. That deal involved the issuance of £1.2 billion of new bonds.
The challenges at New Look have been apparent for some time, but weak ebitda generation at the end of last year hit cash flow and forced the company to act.
UK like-for-like sales were down 5.7% for December and target core ebitda has been reduced from £100 million to £84 million for 2019. While the firm competes in a particularly vulnerable sector – UK retail – it also serves as a clear example of how vulnerable highly levered firms are to ebitda declines.
“A 5x levered retailer is not exactly ideally placed to navigate the UK retail minefield,” observed analysts at CreditSights when the restructuring was announced. “As the impact of late November and December 2018 trading demonstrates, a collapse in operating leverage can suck financial flexibility out of a struggling business very quickly.”New Look bondholders would seem to have little alternative to the proposal, which should be concluded by mid 2019. They are understood to include Carlyle, Blackstone’s credit division GSO, asset managers CQS and M&G Investments, investment firm Alcentra and distressed debt investor Avenue Capital Group.