True Religion had been on the watch list of some credit ratings agencies, which cited its high debt levels as a significant pressure on its balance sheet. Back in September 2016, Fitch Ratings cited seven U.S. retailers with significant default risk through 2018. These included Sears Holdings Corp.; Claire’s Stores; True Religion; 99 Cents Only Stores; Nebraska Book Co.; Nine West Holdings, and Rue21 Inc. Of the firms cited, True Religion and Nine West are primarily wholesalers, even though they have enough stores to be considered “retail” operators.
Fitch’s leverage finance team noted that secular challenges — the rise of e-commerce and discount retailers, declining mall traffic and consumer spending shifts toward services and experiences — are an added complication to the natural “ebb and flow of brand popularity” companies face. True Religion and Nine West were both cited for concerns over their institutional term loans.
Highly leveraged capital structures mean that companies can find themselves on a slippery slope to bankruptcy as negative comparable-store sales and fixed deleveraging costs lead to negative cash flow and tight liquidity.
In the case of True Religion, the company in May 2013 agreed to be acquired by TowerBrook Capital Partners for $835 million, or $32 a share in cash for all of the company’s outstanding shares. That represented a premium of 52 percent to the denim firm’s share price on Oct. 9, 2012, before it had begun evaluating strategic alternatives.
One former True Religion investor said at the time that the price was too high, given what he saw back then as a lack of a compelling product line and what seemed to be the start of a slowdown in consumer interest in premium denim.
But the firm’s bankruptcy filing also raises a question about private equity investment in fashion brands: Could True Religion be the start of the next wave of Chapter 11 filings by wholesalers that are over-leveraged due to private equity investments?
Nine West was part of the Jones Apparel Group that was acquired by private equity firm Sycamore Partners in April 2014 for $2.2 billion. After the deal was completed, Sycamore split the businesses into different groups. In January, Nine West inked a deal to acquire its former Jones Apparel Group sibling, women’s suit and sportswear brand Kasper. The acquisition was meant to expand Nine West’s affordable, wear-to-work business offerings for women, and — because Kasper was a profitable business — was expected to have a positive impact on Nine West’s financial performance. But the deal didn’t have an immediate impact and instead the company hired Lazard in May to help it with a debt restructuring. In addition to weak cash-flow generation and high debt leverage, Nine West has an upcoming maturity of $1 billion of debt in 2019.
Fitch in May took a look at leverage loan defaults — predicting a retail loan default rate of 9 percent this year — and this time included in its “Loans of Concern List” apparel brands NYDJ Apparel and Vince, which on Wednesday amended its term loan agreement and began a rights offering to ease its debt pressure.
For now, at least, True Religion doesn’t have to worry about going the way of many retail predecessors such as Gordmans, Gander Mountain and The Limited, all of which have headed to the retail graveyard.
Based in Manhattan Beach, Calif., the denim brand estimated assets and liabilities each at between $100 million to $500 million. Among the top 30 unsecured creditors listed, the holders of the claims were either trade providers or landlords. The top trade claim was from the Lya Group in Los Angeles, at $826,520; the top landlord claim was 513 Broadway Realty LLC in New York, at $376,315.
True Religion reached an agreement with its lenders that include TowerBrook to cut its debt by more than $350 million. John Ermatinger, the brand’s chief executive officer, said the filing and reduction in debt would help to “reinvigorate True Religion’s iconic brand and position the company for future growth and success.” The plan of reorganization, which needs to be agreed upon by creditors and the bankruptcy court, includes the repayment of trade claims — including those of landlords — in full, the company said. It has a debtor-in-possession facility for up to $60 million from Citizens Bank.
In a document filed with the Delaware bankruptcy court, True Religion’s chief financial officer Dalibor Snyder said the company “has been adversely affected by a macro consumer shift away from brick-and-mortar to online retail channels,” as well as a decline in the premium denim market over the last several years. Provided the planned debt reduction agreed to with lenders receives bankruptcy court approval, True Religion is set to exit bankruptcy court with $139.5 million in debt versus $493 million before the filing. Holders of First Lien and Second Lien claims who have agreed to the plan would see their claims exchanged for equity in the reorganized company.
The company has 140 True Religion and Last Stitch retail stores — 128 are in the U.S. and Canada — and more than 1,900 employees. For the fiscal year ended Jan. 28, the company had total assets of $243.3 million against total liabilities on a consolidated basis of $534.7 million. It posted a net operating loss of $78.5 million and net revenues of $369.5 million for the same period.