August 10, 2017 / 3:20 PM / 8 days ago

LPC-Holland & Barrett latest retailer to limp through loan market

LONDON, Aug 10 (Reuters) - UK-headquartered health food and supplements chain Holland & Barrett was forced to make significant changes to a £900m-equivalent buyout loan to attract enough support prior to closing, as retail credits struggle to win investor favour.

Russian billionaire Mikhail Fridman’s L1 Retail announced at the end of June it would buy Holland & Barrett from The Nature’s Bounty Co and Carlyle Group for £1.77bn, prompting a new leveraged loan that was expected to appeal to deal-starved investors.

However, the arranging banks had to reduce a sterling portion of the loan, increase a euro portion and offer higher pricing and more investor–friendly provisions to documents in a bid to wrap up the deal, under pressure to get it off their books before the summer slowdown.

“The flex was higher than where people expected it to come,” an investor said.

It comes after French jewellery retailer Thom Europe was forced to scrap plans to pay its private equity owners a €140m dividend at the end of July, after a wider loan refinancing ran into opposition from investors.

Like Holland & Barrett, Thom Europe was also a debut loan issuer as it refinanced out of the bond market, but that was not enough to tempt certain funds, which either rejected the deal outright or needed the company to make a number of concessions before going into it, including a pricing increase.

SHOPPING FATIGUE

A number of investors are wary of lending to the retail sector, which is at the mercy of public confidence and associated discretionary spending. It also continues to face stiff competition from internet retailers.

Despite much of the market trading over par this year in Europe’s secondary loan market amid a supply and demand imbalance, average bids on Western European leveraged first lien retail loans was 92.9% of face value on August 10, according to Thomson Reuters LPC data.

Bids rose from 81.9% of face value at the end of the fourth quarter of 2016, to 85.1% at the end of 1Q17 and 87.4% at the end of 2Q17, mainly prompted by technicals driving the market rather than any improvements to the quality of the underlying credit fundamentals.

Many loan investors are still scarred after losing money on struggling French clothing retailer Vivarte, which has been through several debt restructurings since 2013.

In addition, German outdoor brand Jack Wolfskin recently completed a financial restructuring in July, which saw lenders take control of the business from private equity firm Blackstone in a debt for equity swap.

Under the terms of that restructuring, Jack Wolfskin wiped €255m from its €365m term loan debt to a €110m reinstated tranche that has equity stapled to it and its maturity was extended to 2022 in return for handing the keys to the lenders.

Other retails have struggled too. New Look’s bonds continued to fall into deeper distressed territory after taking a dive on the back of poor results released on August 8.

The UK retailer’s £177m 8% 2023 senior unsecured note traded down to a bid price of 39, while its £700m 6.50% 2022 senior secured note was down to 63 this week, according to Tradeweb data.

A large number of investors are agnostic between the loan and bond asset classes and many were spooked by New Look, lenders said.

“Holland & Barrett has some retail and some wholesale. It is a niche retailer with a tremendous track record and is in a segment that has been growing, health and nutrition, so it is different to New Look and other retailers. Despite this, investors are cautious around retail in general,” a senior banker said.

PAID UP

Some investors didn’t buy into Holland & Barrett’s business case, thinking much of what it retails could be situated within a couple of shelves in a supermarket. Other investors didn’t mind the business, but wanted to be paid up for sterling and the fact it was an aggressive structure for a new sponsor, sources said.

Holland & Barrett’s leveraged loan financing finalised with a £450m seven-year first-lien term loan and a £375m-equivalent seven-year euro-denominated first-lien term loan. The sterling launched at £550m, while the euro portion launched at £275m-equivalent.

The sterling pays 525bp over Libor, increased from initial guidance of 450bp-475bp and the euro portion pays 425bp over Euribor, up from initial guidance of 350bp-375bp. Both have a 0% floor.

The dual-currency loans allocated at 98 OID, from initial OID guidance of 99.5. Citigroup, HSBC and UBS led the debt financing, alongside Barclays and Societe Generale.

Soft-call of 101 was increased to 12 months from six months and other tweaks to documentation occurred around improvements to margin ratchet holiday, dividends and additional indebtness.

A £75m six-year dual-currency revolving credit facility remains unchanged at 400bp over Euribor/Libor, with a 0% floor.

“Holland & Barrett just about got over the line,” a second investor said.

Despite general cautiousness around the sector, new retail loans are expected to continue to be completed, albeit with concessions.

“Investors are not out of the retail business and banks aren’t either, we’re just picking and choosing what we do and how we do it,” the senior banker said. (Editing by Christopher Mangham)

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