Issuer Covenant Card: Iconix Brand Group

Relevant Items:
Covenants Tear Sheet, Debt Document Summaries
Iconix Brand Group’s Debt Documents

Iconix Brand Group is a brand management company and the owner of a diversified portfolio of approximately 30 global consumer brands across women’s, men’s, home and international industry segments. Although its first-quarter adjusted EBITDA increased 3% year over year, from $11.6 million to $11.9 million, its 2020 fiscal year EBITDA of $55.1 million is 32% lower than its 2019 fiscal year EBITDA of $80.8 million. Iconix Brand Group’s difficulties pre-date the Covid-19 pandemic, however, as its 2019 fiscal year 10-K included a going-concern opinion from its auditors. The going-concern opinion triggered a default under the credit agreement that the lenders waived; it was the lenders’ fourth waiver since the credit agreement closed in August 2017.

The bulk of the company’s debt consists of securitization notes that are the obligations of four limited-purpose, bankruptcy-remote, wholly owned subsidiaries of Iconix Brand Group. The negative covenants in the securitization notes restrict only the four co-issuers, so we do not discuss them here. Debt that is recourse to Iconix Brand Group includes term loans and 5.75% convertible second lien notes due 2023 (which, in addition to being second lien, are also payment subordinated to the term loans).

The company’s capital structure as of March 31 is shown below:
     

• Financial covenants - The credit agreement contains two financial covenants. First, the ratio of the “Asset Value” (a complex calculation, the result of which the company does not disclose) to the outstanding term loans may not be less than 1.25x. We cannot calculate this ratio with the publicly available information, but the company did not report any defaults related to this covenant.
  
  The second covenant requires that the “Total Leverage Ratio” not be greater than 5.75x. “Total Leverage Ratio” is a misnomer, as the covenant ratio includes only the outstanding term loans in the numerator. We estimate that the ratio of term loans, net of unrestricted cash, to adjusted EBITDA is less than 1x, putting the company comfortably in compliance.
   
• Debt and lien capacity - The credit agreement permits $5 million of general debt (which can be secured if incurred by a loan party) and unlimited subordinated debt of Iconix Brand Group, subject to certain conditions. The subordinated debt can be guaranteed by the credit agreement guarantors but not by the credit agreement borrower.
  
  The notes are more liberal and contain a ratio debt basket available to the loan parties permitting unlimited debt as long as the fixed charge coverage ratio is at least 2x; this debt can be secured as long as the total leverage ratio would not be greater than 5.5x. Based on March 31 financials, however, the ratio debt basket is not currently available. Other baskets include a general loan party debt basket for the greater of $10 million and 10% of EBITDA and a $275 million senior credit facility basket. Given the amount of term loans outstanding, the notes permit just over $200 million of additional loan party secured debt.
   
• Restricted payments and investments - Neither the credit agreement nor the notes contain any general restricted payment baskets, and while the notes do include a builder basket, they also state that Iconix Brand Group may not make any cash distributions to equityholders for as long as the notes are outstanding.
  
  The credit agreement contains a $10 million general investment basket. The builder basket in the notes could provide matching capacity, but it is only available when Iconix can incur $1 of ratio debt, which (as discussed above) it cannot currently do. This leaves Iconix with the following investment capacity: i) $35 million in nonguarantor subsidiaries, ii) $50 million in joint ventures (whose equity is pledged as collateral) and iii) unlimited acquisitions, subject to certain conditions and limited to $200 million in the aggregate for nonguarantor entities and assets.
   
• Debt prepayments - The credit agreement contains a covenant that prohibits the prepayment, redemption or purchase of any debt for borrowed money prior to its scheduled maturity, subject to exceptions. Nonsubordinated debt can be prepaid or repurchased as long as there is no default or event of default, but since the notes are subordinated, they do not fit into this exception.
  
  There is a note-specific basket that permits regularly scheduled interest payments and payments of fees/expenses when due and payments with, and conversions into, equity of Iconix Brand Group. The only basket that would permit open-market purchases of the notes is a basket allowing debt payments in exchange for, or out of the proceeds of, the net proceeds from equity issuances of Parent.
   

--Alisha Turak