German fashion retailer Takko’s bonds have come under pressure over the past few weeks due to concerns that the company may be unable to refinance its €285 million senior secured notes due November 2023 and its €225 million floating rate notes due at the same time.
The €225 million note has declined by 5.4 points to about 78.3, while the €285 million note has fallen by 5 to about 78.9 over the last week.
Sources told Reorg the bonds are mostly held by a small number of distressed debt hedge funds and there is little trading at the moment.
The group also needs to refinance a
senior secured private placement of €35.1 million due in August 2023 as well as extend or refinance its €80 million loan due May 2023 and an €180 million letter of credit facility, which ranks super senior on enforcement.
Investors are worried about the company refinancing in good time given that primary markets remain choppy and that Takko is exposed to raw material price inflation on goods such as cotton as well as energy costs. Another source also noted concerns over logistics given that a lot of the products are shipped from China with long lead times of several months due to the Covid-19 pandemic still causing widespread disruption in China.
In addition to this, the
minimum wage in Germany, where the company has most of its stores, will rise to €12 per hour, adding further strain on the group’s cash flows.
In the group’s most recent call, management told investors that it does not intend to pass on all inflationary costs to customers to gain market share. One source questioned this strategy saying it wasn’t clear if that would work given that the company’s customers tend to shop at Takko’s out-of-town locations placed next to supermarkets for convenience and a small price difference may not attract many more customers.
Takko’s management is pinning hopes on its
expansion plans focused on Poland, Italy and France for growth but some investors are not convinced of this strategy. The company is targeting to open 50 to 100 stores this year and said capital expenditure per store would be about €100,000.
Trust in the sponsor Apax, which has owned the company since 2010, has been damaged since chaotic restructuring discussions in 2020, which were
triggered by the company missing its May 15 coupon payment in summer 2020 following a liquidity crisis due to Covid-19 restrictions.
Apax purchased its stake in Takko for €1.3 billion at a €1.4 billion valuation, or 8.2x adjusted EBITDA of €171 million. The transaction was funded with €675 million of new equity from Apax, a €100 million vendor loan from Advent and a €600 million drawn term loan. As part of the 2013 refinancing, Apax contributed a further €100 million of equity. According to the 2023 senior secured notes’ offering memorandum, Apax had invested €963.6 million of equity in the business as of July 31, 2017, with the sponsor contributing a further €15 million of the €30.3 million secured private placements in March 2021.
Some investors have also criticized adjustments to EBITDA (including among others, add backs for losses/gains arising on revaluation of inventories and financing and transaction costs) and have pointed out that the cash generation has been low and came mostly from usage of the letters of credit facility. Historical generation of levered free cash flows after lease payments has been relatively volatile, with 2021 seeing cash generation of about €46 million, which was supported by an inflow from working capital of about €47 million during the period.
During the negotiations in 2020, the company
initially proposed a 40% haircut to bondholders with Apax unwilling to inject any equity. However, this changed when trading materially improved following the lifting of Covid-19 related restrictions. In the end, the group
secured a €54 million bridge loan comprising a €23.5 million senior secured facility, which was extended as a new facility under the group’s existing €275 million senior facilities agreement.
It also secured a privately placed €30 million instrument ranking
pari passu with bonds, which was split into a €15 million tranche provided by the shareholder and a €15 million tranche provided by an existing lender.
At the time, the bondholders worked with Houliahn Lokey and Freshfields, the banks with Clifford Chance and DC Advisory and the company was advised by PJT and Gleiss Lutz. The company continues to work with Gleiss Lutz on an ongoing basis, sources noted.
Following the liquidity transaction in 2020 there were several changes to management including the
appointment of Tjeerd Jegen as CEO.
Some investors say it is questionable whether sponsor Apax would be prepared to support a refinancing with an equity injection, and bonds with a higher interest rate could make the capital structure unsustainable. As a result, some investors say part of the debt needs to be equitized.