Wed 11/03/2021 10:21 AM
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Relevant Items:
Rent the Runway’s Debt Documents
Rent the Runway’s Debt Document Overview, Flexibility Scale

Rent the Runway is an online e-commerce platform that enables customers to rent designer apparel and accessories. Founded in 2009, the company gives customers ongoing access to its rentals through its subscription offering and on an a-la-carte basis through its reserve offering.

The company has a first lien credit facility, comprising a $75 million term loan with Ares Corporate Opportunities Fund V LP (the “Ares Facility”) and a $230 million second lien term loan facility with Double Helix Pte Ltd., an affiliate of Singaporean investment company Temasek Holdings (Private) Ltd., consisting of a $100 million term loan A, a $100 million term loan B and a $30 million term loan C. Both credit facilities are secured by substantially all assets of the loan parties, including Rent the Runway Inc. (the “Borrower”) and its subsidiaries, and guaranteed by the Borrower’s subsidiaries.

On Oct. 4, Rent the Runway filed an S-1 in connection with its planned IPO, which on Oct. 26 was priced at $21 per share, reflecting expected net proceeds of about $327.3 million (or $377.3 million if the underwriters fully exercise their over-allotment option). The company’s common shares now trade on the Nasdaq under the ticker symbol RENT.

According to disclosures, the company intends to use the proceeds from its IPO to “repay all amounts outstanding under [its] first lien facility” (the “First Lien Repayment”) and to repay “$30 million of outstanding loans under [its second lien] Credit Facility” (the “Second Lien Repayment”), with any remaining net offering proceeds to be used “to fund growth, fund other general corporate purposes, or to pay down additional amounts under the [second lien] Credit Facility.”

In anticipation of the IPO and debt repayment transactions, the company on Oct. 18 entered into a seventh amendment to its second lien credit agreement, which extended the maturity and modified the pricing of certain of the second lien term loans, among other changes. The effectiveness of the seventh amendment was contingent on, among other conditions, the completion of the First Lien Repayment and the Second Lien Repayment as well as the company’s receipt of at least $200 million of gross proceeds from its IPO. Although the company has not yet disclosed whether the debt repayment transactions have been completed, our analysis assumes that the seventh amendment to the second lien credit agreement was effective as of the date of this report.

The company’s capital structure as of July 31 - pro forma for consummation of the offering, the First Lien Repayment and Second Lien Repayment and the effectiveness of the seventh amendment to the second lien credit agreement - is set forth below.

In this article we discuss notable terms of Rent the Runway’s second lien credit agreement, including the changes made by the seventh amendment, and what effect, if any, the IPO proceeds may have on the company’s covenant flexibility.
Changes Made by Seventh Amendment to Second Lien Credit Agreement

$50 million minimum liquidity covenant - The credit agreement’s only financial covenant, which was added by the seventh amendment, is a $50 million minimum liquidity covenant, which is tested at all times. The company is required to provide a liquidity report demonstrating compliance with the minimum liquidity covenant promptly upon the agent’s request.

PIK toggle - Prior to the seventh amendment, the term loan A and term loan B bore interest at a fixed rate of 15%, all payable in PIK, and the term loan C bore cash interest at a fixed rate of 13%. After the seventh amendment, the term loan A and term loan B will accrue interest at a fixed rate of 12%, of which up to 5% may be PIK, and the term loan C will be repaid in full.

Enhanced call protection, prepayment premiums (TLA, TLB) - Prior to the seventh amendment, prepayments of the term loan A and term loan B under the second lien facility were subject to a 36-month no call period commencing from the applicable term loan closing date. After the seventh amendment, any prepayment of the term loan A or term loan B prior to maturity is subject to the “Yield Maintenance Premium” and the “Prepayment Premium,” which are each defined in an undisclosed fee letter.

Extended maturity (TLA, TLB) - Pursuant to the seventh amendment, the maturity date of the term loan A and term loan B was extended from July 21, 2023, to the three-year anniversary of the seventh amendment effective date, which would be on or about Oct. 27, 2024, assuming the seventh amendment effectiveness conditions were met substantially contemporaneously with consummation of the IPO.
Flexibility Under the Second Lien Credit Agreement

IPO proceeds will not increase flexibility under credit agreement - Because the credit agreement contains no baskets that would increase with capital contributions or equity proceeds (for example, contribution debt, builder basket, leverage-based basket), the company’s capacity under its credit agreement to incur debt, make restricted payments or investments or prepay other debt will not increase as a result of its IPO.

In addition, because the credit agreement does not include any leverage-based capacity, the reduction in the company’s leverage after the repayment of the first lien facility will also not provide it with any additional flexibility.

Senior debt capacity - The credit agreement permits $30 million of senior lien debt under a revolving credit facility; all other general-purpose permitted debt must be pari with the term loans, secured on a junior lien basis or unsecured.

No restrictions on prepayments of secured debt - The second lien credit agreement does not restrict the company from prepaying secured debt (and therefore does not prohibit the company from making the First Lien Repayment). Instead, the credit agreement prohibits the company from prepaying “Subordinated Debt,” which is generally defined as “any unsecured Funded Debt of any Credit Party and other obligations under the Subordinated Debt Documents and any other Funded Debt of any Credit Party which has been subordinated in right of payment and priority to the [term loan obligations], all on terms and conditions satisfactory to the Agent.”

As summarized in the flexibility scale below, the second lien credit agreement provides Rent the Runway with (a) limited flexibility to incur new debt that is secured on a senior or pari basis with the second lien term loans and (b) extremely limited flexibility to pay dividends. In addition, because the second lien credit agreement does not distinguish between restricted and unrestricted subsidiaries, all of the company’s subsidiaries are subject to the credit agreement’s negative covenants, so there is no mechanism by which the company could send value outside of the restricted group.

 
Other Notable Terms of the Second Lien Credit Agreement

As summarized in the below table of material terms, Rent the Runway’s second lien credit agreement is generally highly protective of lenders and does not contain any notably aggressive or borrower-friendly terms.

--Julian Bulaon
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