NEW YORK — Phillips-Van Heusen Corp. might have scored a crown jewel in Calvin Klein Inc., but the long-term gain has a short-term cost.
Moody’s Investors Service took its rating on PVH’s debt down two notches Wednesday, given the acquisition’s price tag.
Moody’s dropped PVH’s senior implied debt rating to "B1" from "Ba2," leaving the measure four notches into sub-par or "junk" territory.
Additionally, the senior unsecured issuer rating was lowered to "B2" from "Ba3;" the rating on $100 million in senior secured debentures due 2023 was cut to "B1" from "Ba2," and $150 million in senior subordinated notes due 2008 were lowered to "B3" from "Ba3."
Moody’s rated PVH’s debt outlook as stable.
"The downgrade reflects the negative impact on PVH’s cash flow resulting from the significant purchase price for the CKI acquisition, which increased leverage, inclusive of leases and preferred stock," said Moody’s in a statement.
In February, PVH completed the nearly $600 million deal, which included $400 million in cash, $30 million in PVH stock, a nine-year warrant to Klein to purchase PVH shares and contingent payments to the designer for 15 years based on sales of Calvin Klein branded products.
Cash for the deal was financed through a $250 million convertible preferred stock issuance to Apax Managers Inc. and a $125 million two-year secured loan from the same. Apax will control 33 percent of the voting shares of PVH.
Moody’s noted a timing mismatch between the potential cash growth for PVH from CKI versus the cash outflow related to the acquisition financing.
"The acquisition cost increases leverage on a cash basis and causes a cash drain due to the substantial contingent purchase price payments and a minimal intermediate term consulting agreement with Mr. Klein," said Moody’s.
PVH’s new rating, said Moody’s, also recognizes "significant opportunities for revenue and margin enhancements for PVH from the Calvin Klein brand via increased licensing revenue, sub-branding, expertise in the women’s market and potential cost savings within the Calvin Klein infrastructure."
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