New Look to issue £800m in debt

British company New Look Retail Group Ltd. has announced the issuance of £800m ($1.2bn) in corporate bonds to refinance high-interest payments-in-kind (PIK) notes. PIK notes are debt instruments that are considered high risk due to their full return on maturity instead of the normal practice of coupon payments throughout the issuance decreasing the risk of one concentrated payment. Due to this they offer high yields to investors but often quickly eat into profits.

Currently the company has £1.1Bn of debt which is five times its 2012 operating profits. £746m of this is PIK notes running at 9% interest plus the London Interbank Offered Rate (LIBOR).

The company will seek to repay priority senior PIK holders such as HSBC and the Royal Bank of Scotland (RBS) and second priority mezzanine holders in full – a total of £470m.

The move will exchange the payment of senior and mezzanine PIK holders for longer term five-year bond holders at lower rates, leaving the company with the £800m in bonds and the lowest priority PIK holders worth £373m allowing new chief executive Anders Kristiansen, who took over operations in 2012, vital space to manoeuvre. New Look, operating 1,141 stores worldwide and nearly 600 UK stores, was purchased in a leveraged buyout using borrowed funds in 2004. After the company fell into trouble, private equity groups Apax, Hugo Boss owner Permira and founder Tom Singh signed a deal worth £669m.

The last five years have represented falling profits in the company as New Look focused on young customers at the expense of its older consumer base, while at the same time dealing with interest on debt eating into profits.

Nick Bubb, a retail analyst, has said: “New Look is not exactly in rude health. It traded well over Christmas, but – God knows” Chief Finance Officer, Alastair Miller has stated that the companies single goal now is to “decrease leverage,” running at a ratio of 1:5.8 in earnings-to-debt. Last year, New Look had to dismiss allegations that it was close to entering administration in the same way as clothing retailer Peacocks which failed due to annual high interest on PIK notes eating into the stores’ profits. The issuance of New Look’s bond will allow a crucial test of investors risk appetite for highly leveraged companies post 2007. Goldman Sachs and JP Morgan are heading the bonds and expect the issuance to be within early May with banks meeting investors in Europe and the US between April  29^th and May 2nd.             

Patrick Corby