Moody’s said Thursday in a new report that stressed retailers who place assets into subsidiaries unrestricted by their credit agreements to reduce leverage could be putting their secured lenders at risk.
That risk is connected to the possibility of an impaired recovery should the retailer file for bankruptcy, Moody’s said.
The way it works is based on the unrestricted subsidiary’s ability to issue debt or borrow new proceeds secured by the transferred assets. And with a new class of secured debt having a superior claim to the transferred assets, that leaves existing lenders further down on the totem pole — even though the relocated assets had been relied on as collateral for the original loans.
Raya Sokolyanska, a senior analyst at the ratings agency, said, “These transfers allow companies to raise new debt at the transferee level secured by those assets, which can be used as a cash infusion that buys time for operational improvement, or for a debt exchange that reduces leverage or takes out a near-term maturity.”
The analyst noted that in either case, the maneuver harms existing secured lenders because it “lowers the recovery value of their loans in a potential bankruptcy.”
For most retailers, the most valuable asset is their intellectual property. Retailers with valuable brands are more likely to pursue asset transfers because of the ability to borrow against the transferred IP for new financing or the potential for deleveraging. The report noted Cole Haan, Vince and Toms Shoes as stressed retailers in the position to pursue an asset transfer.
The report noted that of the 25 retail and apparel companies rated B3 negative and below, 83 percent have covenant provisions that allow for asset transfers to unrestricted subsidiaries.
J. Crew was cited by Moody’s as one example of a company that recently did such a transfer when it put 72 percent of its U.S. trademarks, valued at $250 million, into a new subsidiary out of the reach of lenders. The retailer is also now embroiled in litigation with lenders who say the IP belongs to them as a term of a 2011 loan agreement.
In March, Neiman Marcus moved Mytheresa and three stores to an unrestricted subsidiary, and Claire’s Stores last year obtained a $130 million loan collateralized with IP that had been moved to another entity to support a distressed exchange.
In the report, Moody’s cited Neiman Marcus Group, Lands’ End, Vince and Eddie Bauer as brand names that still have meaningful brand equity. Firms such as Bon-Ton Stores, Charlotte Russe, Charming Charlie, David’s Bridal, Nine West and True Religion Apparel were cited as brands having limited value outside of retail operations or having some brand equity.
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