Moody’s Investors Service has downgraded the corporate family rating of Nine West Holdings Inc.

The downgrade by the credit rating agency now gives Nine West the rating at “Caa3” from “Caa2.” While the rating outlook is “stable,” the agency also downgraded the firm’s Probability of Default Rating to “Caa3-PD” from “Caa2-PD.”

On Tuesday, Nine West said it entered into a definitive agreement to acquire women’s sportswear firm Kasper Group. Terms of the deal were not disclosed and Nine West said it would use the net proceeds of its sale of its Easy Spirit wholesale business to purchase Kasper. Nine West sold Easy Spirit to Marc Fisher Footwear, which is also the footwear licensee for Tommy Hilfiger snd Ivanka Trump.

When Ralph Schipani, interim chief executive officer of Nine West, disclosed the pending transaction on Tuesday, he said, “The Kasper Group is a profitable wholesale business that we anticipate will make a positive impact on the company’s financial performance. This acquisition of Kasper’s reputable branded apparel will enable Nine West Holdings to offer its customers an array of women’s affordable, wear-to-work tailored clothing, footwear and accessories.”

Schipani added that in selling Easy Spirit, the company “sold an underperforming asset with negative EBITDA and reinvested the proceeds into a profitable Kasper business,” a move that he said would bring “immediate improvement to the company’s cash flow and liquidity, resulting in a significant deleveraging of the company.”

Nine West has been on the watch list of credit agencies due to its high leverage. And the recent swap in selling Easy Spirit to acquire the profitable Kasper didn’t do much to ease the leverage concerns of Nine West’s balance sheet.

Moody’s analyst Mike Zuccaro said, “Despite the positive impact expected from the recent sale of its Easy Spirit wholesale business and acquisition of [Kasper], the ratings were downgraded to reflect Nine West’s very high leverage and unsustainable capital structure due to weak operating performance and high debt levels.”

Zuccaro said the addition of the profitable Kasper would improve Nine West’s balance sheet leverage to “around 18 times from around 35 times for the 12-month period ended Oct. 1, 2016.” But he explained that even though the company has taken additional actions to improve operations, “significant improvement is still needed to reduce leverage to more sustainable levels.”  Zuccaro concluded that because of ongoing business and industry challenges, “and debt maturities that begin in March 2019, Nine West has a very high probability of default, including the potential for a distressed exchange-type of restructuring.”

Moody’s said Nine West’s liquidity is adequate and that it “appears sufficient to fund operations and to meet seasonal working capital needs over the near term.”

 

 

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