The high cost of money has raised concerns over the ability of Goody’s Family Clothing Inc. to return to profitability after it filed for Chapter 11 bankruptcy court protection.
This story first appeared in the June 11, 2008 issue of WWD. Subscribe Today.
While much of the discussion before and since the filing Monday has focused on Goody’s plan to close 69 underperforming stores out of the 355 currently in operation, its post-bankruptcy financing arrangements are now raising eyebrows in the credit community.
The company has arranged a $210 million debtor-in-possession (DIP) financing facility, which includes $175 million under a revolving credit facility from General Electric Capital Corp.; $15 million under a term loan facility from GB Merchant Partners, an affiliate of Gordon Brothers Group, and $20 million under a junior term loan from PGDYS Lending LLC, an affiliate of Goody’s parent, Prentice Capital Management.
What has some credit analysts concerned is whether there will be much cash to operate the retailer after it makes its interest payments. The revolver with GE has a rate of LIBOR, now at 3.21 percent, plus 275 basis points, or 2.75 percent. The two combined mean an interest rate of almost 6 percent at a time when most interest rates run about 5.25 percent, said one credit analyst.
But the term loans carry a far bigger toll. The PGDYS term loan has an interest rate of 15 percent and the GB term loan carries a rate of 14 percent.
Another credit analyst said the high rates “make it harder for a company to come out of Chapter 11 because they’re paying so much more for interest, which leaves less for the retailer’s operational needs.”
Yet another credit analyst who also thought the rates were high said he had expected the term loans to carry rates closer to 9 percent.
Mary Ann Domuracki, a managing director at investment banking firm Financo Inc., the financial adviser to bankrupt Linens-N-Things, said the rates seem to be in line with those available in the markets.
“Rates are higher for term or second lien facilities in this environment,” she said. “Additionally, traditional banks are lending less against asset values, requiring companies to find second lien facilities or other term debt,” Domuracki said.
The filing in a Delaware bankruptcy court Monday said Goody’s has two secured lenders: PGDYS, which is owed $99 million in pre-petition debt, and CIT/Business Credit, owed $107 million.