Wed 11/10/2021 12:23 PM
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U.K. greetings card retailer Card Factory has failed to attract sufficient interest from market participants after the company explored issuing a bond to refinance £225 million of banking facilities, sources told Reorg. To view the relevant documents linked as well as our EMEA Middle Market team's coverage of thousands of other stressed/distressed debt situations including our Card Factory refinancing analysis, request a trial here: https://reorg.com/trial

The company set up informal meetings with investors in October but was unable to secure the financing package because its last 12 month EBITDA had been impacted by the Covid-19 crisis and subsequent store lockdowns.

Earlier this year, Card Factory refinanced its £225 million debt facilities with its incumbent banks, who remain in their debt positions in the facility. Under the refinancing terms, the company must use “best efforts to raise £70m net equity by July 22 2022, or alternatively to prepay £70m funding from other subordinated sources.”

The facilities are structured to incentivize an early reduction of overall debt, with fees of up to £5 million payable if pre-payments are not made in line with specified dates by Nov. 30 through until July 30, 2022.

Management said in an earnings call in June that it was looking to complete the £70 million equity raise to fund debt pre-payments and reduce net debt. During the call, one investor told management that the “debt terms seem onerous.”

Another investor pressed management to explain why it would not raise debt instruments to fund debt pre-payments. Management said, at the time, that in the current trading environment banks were less willing to provide debt and added it is open to exploring its options.

Card Factory sells cards, party accessories and gifts and has a portfolio of around 1,000 stores across the U.K. and Ireland. Some sources told Reorg that they are concerned about the size of Card Factory’s store portfolio and added that Card Factory is likely to exit expiring leases and seek rent reductions prior to the landlord moratorium in March 2022.

Debt Facilities and Terms

In a recent trading statement, Card Factory said its net debt was £108.4 million (excluding £20.8 million of deferred rents and value added tax) as of Oct. 31 compared to net debt of £142.5 million on Oct. 31, 2020.

Card Factory’s banking facilities comprise a £100 million RCF, a £75 million term loan facility and a £50 million Coronavirus Large Business Interruption Loan Scheme facility. The facilities have an expiry date of Sept. 24, 2023, with the RCF element being extendable by one year if the company achieves certain debt repayment milestones by Nov. 30, 2021.

Under revised covenant terms, the group must achieve defined net debt and EBITDA targets, measured on a monthly basis until March 2022, following which the business will move to quarterly covenant tests of interest cover and leverage. Covenant thresholds are phased to return to 2.5x leverage and 2x interest cover by January 2023.

Recent Performance

Card Factory’s revenue increased 16.3% year over year to £116.9 million in the six months to July 31 following easing of Covid-19 lockdown measures. Reported EBITDA tripled to £23.6 million, according to its most recent earnings report.

During the six-month period, cash flow was £36.1 million compared with £25.2 million in the same period a year earlier. As at July 31 2021, net debt excluding lease liabilities was £96.5 million and leverage came to 4.1x.

The company’s capital structure is below:











































































































































Card Factory


01/31/2021

EBITDA Multiple

(GBP in Millions)

Amount

Maturity

Rate

Book


£100M RCF 1

-

Sep-24-2023

GBP LIBOR + 2.500%

£75M Term Loan 2

75.0

Sep-24-2023

GBP LIBOR + 2.500%

£50M CLBILS Loan 3

45.0

Sep-24-2023


Total Unsecured Debt

120.0

2.6x

Lease Liabilities

144.9



Total Lease Liabilities

144.9

5.6x

Total Debt

264.9

5.6x

Less: Cash and Equivalents

(12.5)

Net Debt

252.4

5.4x

Plus: Market Capitalization

228.9

Enterprise Value

481.3

10.2x

Operating Metrics

LTM Reported EBITDA

47.0


Liquidity

RCF Commitments

100.0

Plus: Cash and Equivalents

12.5

Total Liquidity

112.5

Credit Metrics

Gross Leverage

5.6x

Net Leverage

5.4x

Notes:
Market cap is as of June 11. Reported EBITDA is post-IFRS 16 underlying EBITDA, as reported.
1. Interest margin subject to leverage, with range of 1.0% to 2.5%. Extendable by 1 year to 24 September 2024 if the Company achieves certain debt repayment milestones by 30 November 2021.
2. Interest margin subject to leverage, with range of 1.0% to 2.5%.
3. Amount calculated as total reported unsecured bank loan liability less drawings under the term loan.



Management said it was satisfied with trading during the first half, with better-than-expected performance driven by improvements across all areas of the business. Online is trading in-line with the company’s expectations and in-store footfall and transaction volume continues to recover, albeit transaction volume remains 21.9% below pre-pandemic levels.

Card Factory did not respond to Reorg’s request for comment.

--Lara Gibson
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