After J. Crew Group Inc. and Claire’s Stores Inc. stunned their lenders by transferring intellectual property to unrestricted subsidiaries in the second half of last year, moving a key source of value away from existing debtholders, sources have pointed to IP as one of the most important forces to watch in the retail industry.
In conversations with credit investors and industry sources, three names came up as logical candidates to explore options for moving or monetizing their IP: children’s apparel retailer Gymboree Corp., footwear and apparel group Nine West Holdings Inc., and denim designer True Religion Apparel Inc.
All three are struggling with hefty debt loads and declining performance, and all three were flagged as issuers with near-term default risk on Fitch Ratings’ loans of concern list published on Jan. 19.
David Tawil, president of distress-focused hedge fund Maglan Capital, said Gymboree and Nine West would make sense as candidates to follow in the footsteps of Claire’s and J. Crew because they have brand value to offer.
An industry source who requested anonymity pointed out that in addition to valuable brands, those two companies also have valuable customer relationships.
Larry Perkins, CEO and founder of turnaround advisory firm SierraConstellation Partners, said there is a question of how much those two companies could extract from monetizing their IP as opposed to continuing their current operations. As far as options beyond IP transactions, “the investor community has become so suspicious of specialty retail, and really retail in general,” he cautioned.
Perkins suggested J. Crew’s treatment of its IP could be a bellwether in retail because it is a large player with a highly valuable brand. J. Crew, a portfolio company of private-equity firms TPG and Leonard Green & Partners, is taking financial advice from Lazard.
Gymboree has a short leash for pushing out its debt maturities, leading S&P Global Ratings to say earlier this month that it believes a restructuring or distressed debt exchange within the next six months is very likely.
The kids’ retailer makes an interesting case study for how, under its debt documents, it might be possible to transfer IP and potentially tap its value.
The idea behind monetizing IP is to use it as collateral for a financing. But one factor companies trying to do this have to deal with are “baskets” that exist under loan agreements that often govern how much the borrower can invest for various business purposes.
Covenant Review, a sister company to PacerMonitor, commented that generally speaking, to transfer IP to another subsidiary in order to monetize the IP, a company would need to have capacity for investments under a basket that would allow for investments in unrestricted entities, such as a general basket, a dedicated unrestricted subsidiary investments basket, or a builder basket. Gymboree’s term loan credit agreement has a general basket capped at $90 million or 2.75% of total assets, and a Cumulative Credit builder basket that builds from cumulative retained excess cash flow from the original 2010 closing date. To the extent there is still capacity under those baskets, Gymboree would be able to use that capacity to make an investment in an unrestricted subsidiary, Covenant Review concluded.
In addition to its namesake brand, Gymboree owns labels Crazy 8 and Janie and Jack, the latter of which showed a 4% sales improvement in fiscal 2017’s first quarter while sales at the other two brands fell.
Whatever Gymboree does, time is of the essence. A springing maturity could make its asset-based revolving credit line and asset-based term loan come due in December 2017 instead of 2020 if the retailer does not extend or refinance a term loan it has due February 2018 some 60 days before that maturity, S&P warned.
Boston-based buyout firm Bain Capital paid $1.8 billion for Gymboree in 2010, and the children’s retail landscape has become increasingly competitive since then.
Nine West improved its financial position recently with a deal to acquire apparel producer Kasper Group, but it still faces challenges. According to a company statement, buying Kasper Group, which is also owned by Nine West’s backer Sycamore Partners, will deleverage Nine West and improve its cash flow and liquidity. Taking into account the acquisition and other recent changes, Nine West would have had $90 million in EBITDA for the 12 months ended Sept. 30 rather than $46 million, the company said.
Then, there are also identity issues to consider.
The industry source noted Nine West is primarily a department store brand. In an atmosphere of declining department store sales, the source said the successful department stores brands will be the ones that “find ways to meet ultimate consumers in other channels, whether it’s online, digital, clubs or specialty stores.”
Sycamore Partners acquired Jones Group Inc. in 2014 for $2.2 billion and divided the business into several parts, including Nine West and Kasper Group. In addition to its flagship brand, Nine West owns labels including Anne Klein and Gloria Vanderbilt.
As far as brand transformations are concerned, the industry source said apparel brand group Cherokee Inc. is a case to watch. Cherokee has had a major presence at Target Corp., but Target will stop carrying its brands (excepting the Liz Lange label and Cherokee-branded school uniform products) at the end of this month.
Cherokee has been working on securing new channels and licenses for its products, and the source said it will be interesting to see how the company evolves and who distributes its products.
A credit investor who requested anonymity and a second industry source who asked not to be named put forth True Religion as another troubled candidate with brand value. The credit investor suggested that since Juicy Couture, famous for the velour tracksuits that were all the rage in the early 2000s, was able to sell its brand, True Religion (which also hit its peak trend relevance last decade) may be able to get some value out of its brand as well.
Authentic Brands Group paid $195 million for the Juicy Couture brand in 2013.
Private-equity firm TowerBrook paid $824 million for Vernon, Calif.-based True Religion in 2013.
Intellectual property has been a key source of value for retailers in bankruptcy.
Limited Stores Co., known as a mall-centric women’s clothing retailer, closed all of its 250 stores before filing for bankruptcy this month; its strategy is to sell its intellectual property and e-commerce assets. In its chapter 22 bankruptcy restructuring, American Apparel sold its intellectual property and certain manufacturing equipment for $88 million earlier this month, but thus far has not found a party that wants to keep its stores open long-term. Last year, sporting goods retailer Sports Authority closed all its stores and sold its intellectual property to rival Dick’s Sporting Goods.
Spokesmen for Sycamore and TowerBrook declined to comment, while representatives for Nine West, Gymboree, Bain and True Religion did not respond to requests for comment.
—Lisa Allen is a writer for CapitalStructure, a sister publication of PacerMonitor. Kerry Kantin and Matt Fuller at LevFin Insights, also a sister publication, contributed to this article.
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