Dive Brief:
- S&P Global this week downgraded David's Bridal's credit rating deep into junk territory, to CCC- from CCC, as the ailing wedding apparel retailer talks with lenders in effort to reduce its debt.
- Analysts with the ratings agency said in a client note that they think David's Bridal could announce a distressed exchange or debt restructuring within six months. They added that retailer "continues to report weak operating performance, and liquidity has become further constrained."
- Last month Debtwire reported that David's Bridal had brought in investment banking advisory firm Evercore to help with its financial options. In recent months, according to Debtwire, creditor groups have formed in anticipation of David's Bridal making a deal with some lenders, which could include spiriting off its intellectual property or brand value to a protected entity in order to win an agreement, as J. Crew did last year.
Dive Insight:
For retailers with balance sheet problems, bankruptcy is not the only fate, and most everyone involved, from customers to employees to landlords to most lenders, are better off outside of the court process. David's Bridal — owned by private equity firms Clayton, Dubilier & Rice and Leonard Green & Partners — is one several retailers that have or are looking to shed debt or push it off to buy time.
J. Crew moved to exchange some of its debt last year, which helped the apparel retailer's financial position and at the same time prompted a lawsuit from some lenders who didn't buy into the deal. Guitar Center has also moved to exchange debt this year. Charlotte Russe shed debt this year as well, giving some lenders a majority stake in the process. And Sears has made so many moves to reduce its debt and interest obligations it's hard to count at this point.
In every case above, retailers on the brink managed to stay out of bankruptcy by finding key lenders willing to negotiate, trading debt coming due for equity, new debt, both or some other financial incentive. But it doesn't mean they're safe. Many of those retailers and others who have refinanced their debt remain on various watch lists. Sometimes a debt move merely kicks the can. Toys R Us, for example, made several maneuvers on its debt over the years before falling into Chapter 11. Others have gone on to thrive.
In the case of David's Bridal — which has a new CEO in Scott Key, previously an executive vice president at the company — even if it pulls off some sort of debt refinancing, the retailer still faces market and operational challenges. Debtwire's Reshmi Basu, citing unnamed sources privy to the company's private earnings calls, reported that the retailer's first quarter net sales fell 1%. Earnings and margins fell, too, while comparable sales increased modestly at 0.7%. S&P analysts described the company's capital structure as "unsustainable," with a $520 million loan facility due next year and another $270 million in unsecured notes due in 2020.
"We believe David's competitive position in the highly fragmented bridal gown and related apparel retail segment has materially weakened in recent years," S&P analysts said. "We also think the company remains vulnerable to increased industry price transparency and customers' shifting preferences away from wedding gowns."
