LONDON, May 15 (IFR) - A portability clause in New Look's bonds will allow the British fashion retailer's new owner Brait SE to keep the debt in place, although investors are anticipating a refinancing further down the line.
The South African investment house said on Friday it will buy a 90% stake in New Look for £780m.
New Look raised £800m-equivalent of junk-rated senior secured bonds in May 2013, split between a £500m 8.75% note, a US$250m 8.375% note and a 175m FRN at 625bp over Euribor, all maturing in May 2018.
These bonds include so-called portability language, a relatively recent innovation that allows debt to stay in place after a transfer in ownership without triggering a change of control clause.
The latter provisions usually require issuers to buy back all outstanding bonds at 101 plus accrued interest or pay bondholders for a waiver, thereby reducing flexibility.
The portability clause states that after 18 months the bonds can remain in place under a new owner as long as leverage is below 5x Ebitda. New Look's net debt to Ebitda stood at 4.8x at the end of 2014, according to documents seen by IFR.
A spokesperson for New Look confirmed that Brait intends to keep the existing debt in place initially before reviewing its options further down the line.
"Brait and New Look's management are comfortable with the company's current leverage ratio given its strong cash flow generation," the companies said in a statement.
"Subject to market conditions, the company will review financing alternatives in order to optimise the capital structure within the same leverage range."
Several investors said they expect a refinancing fairly soon, as the fixed rate bonds became callable on May 14 at prices just above 104 while the FRN's call price stepped down to par.
"I think they'll recapitalise at the call prices and raise more debt at a lower average cost," said one investor.
He pointed out that the bonds have not traded up in the secondary market as bondholders expect them to be called.
On top of the senior secured bonds, New Look also has a deeply subordinated payment-in-kind note, which pays interest with more debt rather than the cash.
The PIK note was slashed in half from £739m to £373m in the 2013 refinancing, and has been reduced further since then. The PIK grew to £404m at the end of 2013 but New Look paid it down to £370m by the end of 2014, according to the documents.
The company then prepaid an additional £38m of principal and unpaid interest in May 2015.
In contrast to the bonds, the PIK has climbed half a point higher, according to the investor, bid at a cash price of 107.75 following news of the takeover. (Reporting by Robert Smith, editing by Helene Durand, Julian Baker)