May 3, 2017 / 6:19 PM / 4 months ago

LPC: GNC to sweeten loan extension request after lender pushback

NEW YORK, May 3 (Reuters) - US vitamin and supplement retailer GNC Holdings is expected to offer concessions after a proposal to amend and extend a US$1.2bn covenant-lite loan ran into opposition from lenders concerned that the deal failed to offer adequate compensation for the rising risks of lending to ‘brick-and-mortar’ retailers.

GNC Holdings originally asked lenders to extend the maturity on its existing term loan B by three years to 2022, in return for a coupon of 450bp and a 1% Libor floor with a 100bp consent fee in the form of an Original Issue Discount (OID) of 99. The loan currently pays a coupon of 250bp and a 75bp Libor floor.

The extension request came at an inopportune time. Investors have rebuffed a number of opportunistic transactions in recent weeks after margins have tumbled in an aggressive repricing round, and they are distancing themselves from the retail sector, which is facing stiff competition from online retailers.

Several lenders are still viewing this as insufficient and loan agent JP Morgan is considering further concessions before Thursday’s commitment deadline. These include increasing the coupon to around 650bp over Libor with a 1% floor, upping the amendment fee nearer to 200bp and adding a leverage covenant, two sources said.

“At LIB+ 450bp, the deal is dead in the water,” a source said.

Those terms would come close to bridging the gap between the original offer and demands by lenders in return for agreeing to the extension. The loan documents also will likely be altered to include a springing maturity tied to the borrower's US$287.5m 1.5% convertible notes due 2020, the first source said.

GNC has published a string of disappointing results. Last month, it reported a 3.8% year-over-year drop in 1Q17 sales on the back of a roughly 5% revenue decline in 2016, filings show. Operating income fell 43% in the quarter, after swinging to a US$173m operating loss in 2016 from a US$393m profit the previous year. Adjusted EBITDA clocked in at US$350m in 2016, down 27% from US$480m in 2015, the first source said.

"When you’re a retailer that’s falling out of bed, a proposal like this is patently offensive," the source said. "This is not a par credit. There’s a lot of uncertainty in the business."

Before the amendment was launched, GNC’s loan was quoted at 89-90.67, according to LPC data, but has since been bid up to a 91.83-93.5 market. Still, the discounted levels indicate that investors have not thrown their support behind a deal, the sources said.

Even if the company and lenders agree to new terms, extension restrictions for some funds, such as Collateralized Loan Obligation (CLO) funds, will prevent 100% lender consent. JP Morgan is shopping the loan to new lenders in anticipation of holdouts, and the bank is gaining momentum in building a book, sources added.

GNC is also considering transferring its Intellectual Property (IP) to a new subsidiary as a restricted payment in an effort to bait lenders into extending, sources added. In that scenario, consenting lenders would receive a guarantee from the entity holding the assets. The company has around US$300m of restricted payments capacity at its disposal, but that amount is less than the IP is likely worth, one of the sources noted. That means in order to carry out the dividend, GNC would need to petition lenders to increase the restricted payments basket through an amendment, which it stands a reasonable chance of obtaining since it would only require approval from a simple majority of holders, the source said.

Distressed apparel retailer J Crew also took advantage of the flexibility in its credit agreement last year to move its IP to an unrestricted subsidiary, using a guarantee as a carrot to initiate a bond exchange. The controversial maneuver spurred the threat of legal action from lenders, which claimed that the value of the assets exceeded restricted payments availability. The company preempted lenders with a lawsuit asserting the transfer was bona fide.

JPMorgan declined to comment. GNC did not respond to requests for comment. (Reporting by Andrew Berlin; Editing By Tessa Walsh)

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