Bon-Ton makes proactive pitch for fresh liquidity with the help of BofA

12 August 2016

by Reshmi Basu, Jon Berke, and Danielle Randall

 

Bon-Ton Stores has been reaching out to potential investors with the help of BofA Merrill Lynch to measure interest in a new liquidity-enhancing loan or bond, said four sources familiar with the situation. The distressed retailer aims to bring new cash in the door while it also examines options for carving out real estate collateral backing its USD 830m ABL revolver, the sources added.

 

Timing and structure of any additional financing will be complicated by the slew of headlines, both positive and negative, that have impacted Bon-Ton’s bond prices. The company disclosed on 20 June that United Trust Fund Limited Partnership terminated a sales leaseback deal for three retail locations, which would have netted USD 45m in proceeds. Management explained to investors at the time that United Trust stepped away from the transaction, citing retail sector uncertainty, two of the sources said.

 

News of the cancelled transaction came less than a month after management conducted BofA-led investor meetings to play up its attributes, including excess collateral value under the ABL.

 

Bon-Ton claims the current loan-to-value ratio undervalues the properties backing the loan, therefore the company is looking at ways to separate some of the real estate from the security package, several of the sources said. During the recent investor meet-up, the company estimated there was USD 361m of collateral value in excess of the ABL amount, based on inventory, accounts receivables and real estate, as previously reported.

 

Inventory and collateral have long been viewed as a critical part of the value that forms the backbone of the bull case to invest in Bon-Ton. Brick-and-mortar retailers like Sears and Macy’s, however, are collapsing their footprints. This week Macy’s announced it would shutter 100 locations, or 15% of its store base, to focus more online.

 

Adding to the negative headwinds, Bon-Ton’s leverage remains elevated following a string of sluggish earnings reports. That, combined with the overall gloomy forecast for the traditional retail model, has cast doubt over whether the company can find a long-term balance sheet fix.

 

The borrower’s nearest maturity is a USD 57m slug of 10.625% second lien bonds due in 15 July 2017. Management has telegraphed it has options to retire these bonds, including borrowings from its ABL. Although buysiders have debated how much revolver availability the company can rely on to address the maturity, given covenant language restrictions. Some analysts calculate USD 30m-USD 40m of revolver access, which means the borrower could need to enter into some type of sales leaseback transaction to bridge the gap.

 

Potential liquidity levers include a FILO loan structured incremental to its existing ABL or even a privately negotiated second lien backed by either real estate or inventory, said the first three sources. However, an incremental ABL would require permission from existing lenders and a second lien offering would be a tall order, given that the company’s outstanding USD 350m 8% second liens trade at deeply distressed levels, the same sources noted.

 

The 8% notes traded in small lots yesterday at 43.605, while the 10.625% notes traded at 91.255 to yield 21.734%, according to MarketAxess.

 

For 1Q16 ended 30 April, adjusted EBITDA fell to USD 1.3m, compared with USD 4.1m in the prior-year period, pushing leverage to nearly 9x. For the three-month period, same-store sales declined 2.9%.

 

Looking ahead to FY16, the company is projected to book roughly USD 2.69bn-USD 2.7bn of revenue, versus USD 2.718bn in comparable timeframe. However, EBITDA is projected at USD 125m-USD 129m, coming below company guidance of USD 130m-USD 140m.

 

Based on USD 125m of EBITDA, the borrower would generate USD 28m of free cash flow, accounting for USD 57m of cash interest and USD 40m of capital expenditures. Working capital is expected to be positive with inventory reductions.

 

As of 25 June, Bon-Ton had roughly USD 246.4m of borrowing capacity under its revolver, and the company is predicting a debt increase of approximately USD 40m to USD 50m for FY16, according to a press release.

 

Messages for the company were not returned. A BofA representative declined comment.