September 7, 2018 / 4:36 PM / a year ago

The Container Store cuts borrowing costs in rare retail comeback

NEW YORK, Sept 7 (LPC) - Formerly distressed US storage and organization products retailer The Container Store has returned to the US leveraged loan market to reprice and extend a term loan, in a rare turnaround story as the retail sector remains under pressure.

The ecommerce retailer is asking lenders to drop pricing on its US$292.5m term loan to 500bp over Libor with a 1% floor and extend the maturity by two years to 2023. The loan now pays 700bp over Libor and is trading above par in the secondary market.

Only two and a half years ago, The Container Store’s term loan was trading at distressed levels at 63 cents on the dollar in February 2016.

As traditional retailers battle online competition and buyers’ preferences shift towards e-commerce, The Container Store managed to recover its earnings largely by cost savings, Raya Sokolyanska, a senior analyst at Moody’s Investors Service said.

The company’s performance in the next 12 to 24 months should benefit from an increased focus on custom design and initiatives to grow proprietary products, optimize pricing and reallocate marketing spend to digital channels, Sokolyanska said.

Moody’s said the proposed transaction is credit positive because it will improve interest coverage and liquidity.

The Container Store turnaround comes on the heels of other recent recovery stories of smaller companies in the retail sector, according to Eric Rosenthal, senior director of leveraged finance at Fitch Ratings.

Luxury apparel and accessories brand Vince in August successfully refinanced existing term debt and lined up a US$27.5m term loan. Outdoor gear and apparel seller Eddie Bauer is now exploring a merger with another retailer Pacific Sunwear of California. The company emerged from bankruptcy in 2009 when it was acquired by Golden Gate, but had been struggling to keep up with fashion changes.

“There has been some improvement,” said Rosenthal. “Vince and Eddie Bauer, both small retailers, used to be on our ‘Top Loans of Concern’ list but we moved them off with their recent news. The Container Store is another example of a company trending in the right direction.”

This year has seen only two retail loan defaults - Nine West and Charlotte Russe - totaling US$851m, well below US$3.8bn at this time last year, according to Fitch.

The ratings agency expects retail default volume to pick up again, as Fullbeauty Brands and David’s Bridal look likely to stumble in the near term. Fullbeauty Brands’ US$820m term loan B is quoted at only 30 cents on the dollar in the secondary market, while David’s Bridal’s US$520m term loan B is quoted at 89.5-90.

The default rate for US retail loans now stands at 10%, according to Fitch, and the risks for bricks-and-mortar chains are making investors think twice about lending.

“We are extremely cautious on the sector,” a portfolio manager said. “We are very much paying attention to the secular changes that are occurring in the retail space, whether it be from the Amazon type online competition or whether it’s just from consumer behavior changes.” (Reporting by Yun Li Editing by Tessa Walsh and Michelle Sierra)

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