A delicate balance
New Look’s deal epitomises not only how sophisticated the European high-yield market has become, but also how drastically it can change a company’s fortunes.
Goldman Sachs and JP Morgan were the joint global co-ordinators, with Goldman as left-lead bookrunner. Joint bookrunners were Deutsche Bank, HSBC, Lloyds and RBS. The £808m deal was split into three senior secured, five-year tranches: £500m and US$250m fixed-rate pieces, and a €175m FRN.
The UK “fast fashion” retailer had good growth prospects that were being curtailed by a constrictive capital structure. While loans with impending maturities and restrictive covenants were serious matters, they were not unique to New Look. The real pressure point, however, was a rapidly accreting PIK note, largely held by a seemingly intractable group of hedge funds with ambitions to own the company.
Goldman had the unenviable task of convincing these PIK holders to tender their notes, and roll into a new PIK half the size.
“We needed the PIK holders to agree to the exchange for the whole deal to work,” said Michael Marsh, head of EMEA leveraged finance capital markets at Goldman.
They managed what many thought was impossible: 100% consent achieved, with the new PIK covenants matching those of the senior secured notes.
The PIK exchange was the cornerstone of the deal, but the senior secured notes were no mean feat either. As April turned into May, the market started to heat up, but sentiment around retail was still not particularly strong. The deal’s size was another barrier to execution, and it soon became apparent that it was too large to solely fund in sterling.
“At first sight it was a very large deal, so breaking it down into smaller, more manageable tranches was crucial,” said Marsh.
“For this to work we had to know the US bid was there for the dollar tranche, that the CLO bid was there for the FRN, and that sterling buyers would get comfortable as well. The difficult part was that each of these three markets would only play in the deal if they knew the other two would be there as well.”
Using these different markets to drive price tension worked perfectly, however, with all three tranches pricing inside price talk.
An added challenge in co-ordinating all these moving parts was that the company has no majority owner, with equity split between private equity houses Apax and Permira, founder Tom Singh, and members of management.
The new capital structure completely changed the company. The retailer is free from restrictive loan covenants with expensive debt no longer stifling growth. Above all, the owners have flexibility, particularly from a portability clause that allows the debt to stay in place during a sale of the business.
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