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Default Protection Costs on Nordstrom Debt Tumble After Co. Shelves Take-Private

Credit spreads referencing department store operator Nordstrom (NYSE: JWN) firmed after the company today confirmed recent speculation that the Nordstrom family had suspended its going-private bid for the balance of the year.

Five-year protection costs on Nordstrom debt tumbled by 40 bps to indications of 246 bps, marking a 14% decline. Readings had hovered near 350 bps last month before press reports surfaced that private-equity interest was wavering as financing conditions grow more onerous for brick-and-mortar retailers, particularly following the unnervingly rapid unraveling of Toys R Us.

However, CDS was substantially lower on June 7, at 170 bps, just before the company announced its ambitions to take the storied retailer private. Readings were at 110 bps in early December 2016 before rounds of sector-rattling reports regarding weak holiday shopping results.

Nordstrom 4% notes due March 15, 2027 changed hands this morning at T+175, after trading as wide as T+200 one month ago, trade data show. The 4% 2027 issue dates to pricing on March 6 this year at a tighter T+155 level.

Nordstrom said it would take up its efforts to take the company private “after the conclusion of the holiday season.” Company co-Presidents Blake W. Nordstrom, Peter E. Nordstrom, and Erik B. Nordstrom, President of Stores James F. Nordstrom, Chairman Emeritus Bruce A. Nordstrom, and Anne E. Gittinger made the notification to the Special Committee of the Board of Directors of Nordstrom.

The present BBB+/Baa1/BBB+ ratings on Nordstrom reflect stable outlooks at Moody’s and Fitch, but a negative outlook at S&P Global Ratings since August 2016 due to ongoing sale-store declines across the department-store sector.

S&P Global Ratings in June said the going-private proposition had no immediate effect on ratings, though it assumed any sale would represent a leveraged transaction (in the context of  adjusted debt-to-EBITDA of roughly 2x as of April), and said it would likely place the ratings on CreditWatch with negative implications on the announcement of a specific transaction.

Nordstrom is at present rated higher than its more down-market peers Macy’s (BBB–/Baa3/BBB) and Kohl’s (BBB–/Baa2/BBB), both of which are fallen-angel candidates with negative outlooks on the cusp-level grades at S&P Global Ratings.

Prior to the recent declines, Nordstrom’s go-private strategy had vaulted its debt-protection costs north of the current five-year readings for Macy’s (roughly 300 bps), which reflect both brutal operating progressions and a simmering perception of potential LBO risk. Nordstrom’s CDS also remains more expensive that the 200 bps currently bandied for protection on the debt of Kohl’s, according to Markit. — John Atkins

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S&P: As Risk, Defaults Rise in Retail, Expect Recoveries to Lag other Sectors

Amid sector challenges and rising defaults, default-related losses are likely to be higher in retail than in other sectors, especially for creditors that are either unsecured or have junior-lien positions, according to a new report published by S&P Global Ratings on Thursday.

Furthermore, with retailers historically showing a higher tendency to liquidate rather than reorganize after default, a separate report also finds that recovery prospects in a liquidation scenario are often dramatically lower than when a company continues to operate. This is because most retailers are asset light, meaning most creditors are highly dependent on profitability and cash flow as a source of repayment.

retail recoveryThe overall credit environment is generally improving amid mostly favorable economic conditions, including modest but steady GDP growth, low unemployment, tame inflation, and healthier household balance sheets. This environment—and more stable oil and gas prices—has contributed to a sharp decline in the speculative-grade default rate, which has dropped from 5.1% at the end of 2016 to 3.8% at the end of June, and now stands below the historical long-term average of 4.3%.

In contrast, distress and default levels are rising in the retail sector, with factors such as adapting to online retailing, rising competition, and shifting consumer tastes and spending habits contributing to the struggles.

In terms of trouble ahead, 18% of U.S. retail ratings are in the CCC category or lower, about double the level at the beginning of the year.

Meanwhile, the market is also signaling concern with the distress ratio —the share of speculative grade issues with option-adjusted spreads more than 1,000 bps above Treasuries—rising to 21% for the retail sector, well above that of the oil and gas sector, which has the next-highest distress ratio for a non-financial sector at 14%.

In the post-default scenario, overall recovery prospects for creditors to U.S. retailers are much lower than those for the greater domestic corporate universe, especially for creditors that are either unsecured or have junior-lien positions.

In the event of liquidation, estimated recoveries in the retail sector would be about 50% lower than going-concern recoveries on average. The full reports entitled “U.S. Retail Debt Recoveries Likely To Be Below Average Amid Sector Challenges And Rising Defaults“, and “U.S. Retail Recovery Prospects: Liquidation Could Lead To Worse Recovery Outcomes,” are available at www.globalcreditportal.com and at www.spcapitaliq.com. — Staff reports

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Yum Restaurant Group Lines up $500M High Yield Offering for Dividend, Loan Repay

yum logoYum Brands has guided a $500 million offering of ten-year (non-call five) notes in the 4.75% area, sources said. Books will close at 2 p.m. EDT, with pricing expected today via bookrunners Goldman Sachs (left), J.P. Morgan, Citi, Morgan Stanley, and Wells Fargo Securities.

Proceeds from the 144A-for-life offering will be used to repay roughly $260 million drawn under the company’s revolving credit facility during the second quarter. The balance will fund a cash distribution to the company’s parent to fund share repurchases, dividend payments, and potential repayment of further debt.

The planned new issue is rated BB/B1, according to the leads.

Comparables for the new bonds are the borrower’s own 5% notes due 2024 and 5.25% notes due 2026. The 2024s closed Friday’s session at 104.6, yielding 3.97%, and the 2026s changed hands on Monday afternoon at 105.375, yielding 4.35%, trade data show.

Earlier this month, Yum Brands disclosed that it had entered into a refinancing amendment to its credit agreement dated June 16, 2016, reducing pricing on its $500 million A term loan and $1 billion revolver by 75 bps, to L+150, and extending the maturity of the TLA and revolver to June 2022, from 2019. Note that pricing includes a step-down to L+125 in the event that the total-leverage ratio is less than 2.75x. Via the amendment, the leverage-based pricing grid now ranges from L+125–175, versus L+200–250 previously, as reported. In March, Yum Brands also repriced its then $1.99 billion B term loan due June 2023.

Yum Brands (NYSE: YUM) operates and franchises quick-service restaurants in three segments: KFC, Pizza Hut, and Taco Bell. — Rachel McGovern/Jakema Lewis

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Hi-Grade Bonds: Coach Wraps $1B Offering Backing $2.4B Kate Spade Buy

Coach Inc. today locked in $1 billion of acquisition-related bond funds to finance its purchase of Kate Spade. The two-part senior offering included $400 million of 3% notes due July 15, 2022 at T+140, or 3.106%; and $600 million of 4.125% notes due July 15, 2027 at T+200, or 4.142%.

Both tranches were printed at the firm end of guidance in the T+145 and T+205 areas and through initial whispers in the areas of T+162.5 and T+225, respectively.

The New York–based luxury-goods company placed a debut senior unsecured offering in February 2015 for its acquisition of luxury-footwear company Stuart Weitzman. It printed $600 million of 4.25% 10-year notes due April 2025 at T+225, and the issue has traded over the last month at G-spreads bracketing 185 bps, before accounting for roughly 11 bps on the curve, according to MarketAxess.

In May, Coach announced that it would acquire competitor Kate Spade & Company for $18.50 per share in cash for a total transaction value of $2.4 billion. The deal is expected to close in the third quarter of this calendar year. Since then, Coach disclosed that it obtained a $2.1 billion unsecured bridge term loan credit family from BAML, and a $2 billion loan package from a group of 13 banks, the latter across a $900 million revolving loan facility; an $800 million, six-month term loan credit facility; and a $300 million, three-year term loan facility.

The acquisition will be funded with proceeds from today’s bond offering, along with cash on hand at Coach and Kate Spade, and roughly $1.1 billion in term loans (that the company expects to borrow at or around the time the merger is completed), according to regulatory filings. Additionally, Kate Spade’s $385 million term loan will be repaid with its own cash on hand, filings show.

The deal carries a special mandatory redemption at 101 if the merger is not completed by Feb. 7, 2018. Additionally, the structure offers investor protections via 25 bps coupon steps per each notch downgrade by ratings agencies below the investment-grade level, to a maximum of 200 bps, falling away on a rise at BBB+/Baa1.

Earlier today, S&P Global Ratings, Moody’s, and Fitch assigned respective BBB–/Baa2/BBB ratings to the new offering, which is expected to be $1 billion in size.

The acquisition did not trigger ratings actions from S&P Global Ratings, which only confirmed its current rating and stable outlook. “Pro forma for the new debt and acquisition, we forecast FFO to debt will decrease to mid-30% and improve to high-30% by the end of fiscal 2018 on the repayment of the $800 million term loan and continued EBITDA growth,” the agency said today.

Following the merger announcement, Moody’s reviewed its rating for a possible downgrade, but last week it confirmed the rating and revised the outlook to negative. “While the acquisition will increase the combined company’s pro forma leverage to 3.3 times from 2.0 currently, we expect leverage to decline to about 2.6 times in the next 12 months as the company plans to repay $800 million of debt using its cash balance and make additional prepayments using operating cash flow,” analysts said today.

“The negative outlook reflects the enhanced execution, integration and business risks that accompany the acquisition of Kate Spade particularly in light of the secular shifts in the overall retail business environment, the ever changing fashion trends and over promotion which could result in slowing EBITDA growth,” Moody’s said on June 1 when it revised its outlook.

Fitch—which last month placed its BBB rating on Rating Watch Negative, and anticipates a one-notch downgrade to BBB– once the merger is complete—today assigned its current rating to the new offering. “The acquisition would cause Coach’s leverage to increase from the current 2.6x level to 3.7x on a pro forma basis at closing and decline to around 3.3x at the end of FY 2018 upon the repayment of the $800 million six-month term loan. Leverage is expected to trend to under 3.0x over the following two years on EBITDA growth,” analysts said today. Terms:

Issuer Coach Inc.
Ratings BBB–/Baa2/BBB
Amount $400 million
Issue SEC-registered senior notes
Coupon 3.000%
Price 99.505
Yield 3.106%
Spread T+140
Maturity July 15, 2022
Call Make-whole T+25 until notes are callable at par from one month prior to maturity
Px Talk Guidance: T+145 area (+/– 5 bps); IPT: T+162.5 area
Issuer Coach Inc.
Ratings BBB–/Baa2/BBB
Amount $600 million
Issue SEC-registered senior notes
Coupon 4.125%
Price 99.858
Yield 4.142%
Spread T+200
Maturity July 15, 2027
Call Make-whole T+30 until notes are callable at par from three months prior to maturity
Trade June 6, 2027
Settle June 20, 2017
Books BAML/JPM(act)/HSBC(pass)
Px Talk Guidance: T+205 area (+/–5 bps); IPT: T+225 area
Notes Proceeds will be used to fund a portion of the Kate Spade acquisition
Deal includes 25 bps coupon steps per notch downgrade below investment grade
Special mandatory redemption at 101 if merger is not complete by Feb. 7, 2018


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Nine West retains Lazard to address 2019 maturities

Nine West Holdings has retained Lazard as its investment banker to “proactively evaluate a long-term capital structure solution,” the company announced. Nine West has no near-term debt maturities, its next maturity date being 2019, and is in compliance with the indentures and agreements governing its debt facilities, the company said.

As of Dec. 31, liquidity was $160 million.

Ralph Schipani, interim CEO of Nine West Holdings, said the company will be working with Lazard to proactively address its 2019 debt maturities.

Nine West covenant-lite senior secured term debt due 2019 (L+375, 1% LIBOR floor) is currently quoted in the low 70s, while its unsecured term loan due 2020 (L+525, 1% floor) is marked at 26/29.

Nine West’s existing loans were syndicated in March 2014 to help support Sycamore Partners and KKR’s roughly $1.2 billion purchase of Jones Group, and the business has since been rebranded Nine West. The $445 million senior secured term loan was issued at 99.5, while the unsecured loan was issued at 99. Morgan Stanley is administrative agent.

The issuer is rated CCC/Caa3. The secured term loan is rated B–/Caa1, with a 1 recovery rating from S&P Global, while the unsecured loan is rated CCC–/Caa3, with a 5 recovery rating.

Nine West is a global designer, marketer, and wholesaler, with product expertise in apparel, footwear, jeans, jewelry, and handbags. — Staff reports

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