German Luxury Retailer Douglas Signs $2.8 Billion Rescue Deal
2021-03-26 16:58:35.899 GMT

By Laura Benitez, Antonio Vanuzzo and Ruth McGavin
(Bloomberg) — Just two months ago, German beauty retailer
Douglas GmbH was on the brink of a debt restructuring and
closing 500 stores. Now, it’s won a multi-billion-euro lifeline.
Douglas, owned by CVC Capital Partners, has reached a 2.4
billion euro ($2.8 billion) refinancing and equity deal this
week as investors put their faith in Germany’s economic re-
opening.
It’s another example of the junk bond market running hot as
investors clamor for anything with a yield and are willing to
overlook things that would ordinarily be a red flag, like
falling sales and shuttered stores — all issues that Douglas is
facing. Just a year ago, the company’s debt was trading at
around a third of its face value.
“If the market is supportive of a name like Douglas then it
may pave the way for other similar companies to do the same, so
we could potentially see more aggressive deals come to market in
the coming months,” said Jeff Mueller, Eaton Vance’s co-director
of high-yield bonds, who helps manage $486 billion.
Officials at Douglas and CVC declined to comment on the
refinancing.
Investors did demand higher pricing to compensate for the
risk they’re taking on, and the company had to increase the size
of the most expensive portion of the debt.
“As much as European leveraged finance conditions could be
described as an issuer’s market right now, rising case counts
and extended lockdowns in Germany, France and Italy in recent
days should not be overlooked,” said Neill Keaney, a credit
analyst at CreditSights in London.

Rescue Package Snapshot

* Owners CVC Capital Partners injected 220 million euros of
equity.
* Loan package worth 600 million euros.
* Secured bonds tranche of 1.31 billion euros.
* Payment-in-kind notes of 475 million euros at a coupon of 9%,
which give the company the option to service interest payments
with more debt.

Payment-in-Kind Notes

A small group of investors that manage funds designed to
take higher risk and less liquid assets looked at the deal
before the sale formally started and put in significant orders
for the payment-in-kind notes, according to people familiar with
the matter, who declined to be identified because the
information is private.
“The PIKs are much riskier, but at 9% you have a lot of
income to accrue while watching the story play out,” said Mark
Benbow, a fund manager at Aegon Asset Management in Edinburgh.
“Importantly, for those there is no imminent risk of default now
that they have managed to refinance the shorter-dated bond.”
“We have more conviction in the secured notes, the PIK is
definitely one that could be volatile,” he said. Still, some say
it’s not enough yield to compensate for the risks.
“I would have expected a double-digit coupon given its
junior ranking in the capital structure, but the market is
hunting for yield,” said Solweig Pierronnet, senior credit
analyst at Spread Research in Lyon, France.

Aggressive Package

Despite the challenges it faces, Douglas persuaded
investors to look beyond the pandemic to assess the company’s
financials, and how much debt it can carry. The company’s
adjusted earnings predictions are “very aggressive,” according
to Pierronnet.
“Investors usually don’t like to price the future, but
that’s a reflection of the current environment,” Spread’s
Pierronnet said.
One comfort for investors: the company plans to go public
in the next few years, which means it could start reducing its
debt burden to prepare for a listing, said Aegon’s Benbow.