Apollo-backed Claire’s may restructure debt: Moody’s

Moody’s Investors Service has downgraded Claire’s Stores Inc and says the specialty retailer soon may be restructuring its debt.

Claire’s, based in Hoffman Estates, Illinois, and backed by Apollo Global Management, has $259.6 million of subordinated debt that will be due in June 2017, Moody’s said in an April 7 note.

Charlie O’Shea, a Moody’s VP, doesn’t think Claire’s will have the wherewithal to manage that debt at its current levels of operating performance. This will likely lead Claire’s to a debt restructuring, he said.

O’Shea doesn’t know what sort of restructuring Claire’s will undergo, but it likely won’t be good for investors. “Creditors are likely to be impaired because of the debt maturity,” he said. “Creditors will likely see some diminution in the value of their claim.”

Claire’s sells value-priced jewelry, including rhinestone bracelets for $9.99 each or crystal drop earrings for $12.99, for pre-teens and young adults in 44 countries. The company produces about $1.4 billion in revenue, Moody’s said.

Claire’s is suffering. The retailer continues to “feel the effects of declining mall traffic,” increased competition and economic headwinds surrounding Europe, Moody’s said. This has resulted in Claire’s debt to Ebitda surging to about 8.3x at the end of January, the ratings firm said.

Moody’s has downgraded Claire’s corporate-family rating to Caa3 and its probability of default to Caa3. The company’s outlook is negative, Moody’s said. Moody’s defines “Caa” debt to be “speculative of poor standing” and subject to very high credit risk.

The 8.3x is “really high,” O’Shea said. “There aren’t many retailers that Moody’s rates with debt to Ebitda above 8x.”

The history

Apollo acquired Claire’s in 2007, during the height of the buyout boom, for $3.3 billion. The retailer had no debt when it was sold to Apollo while producing about $189 million in profit, the Wall Street Journal reported.

Ten years later, Claire’s has a $2.4 billion debt load, most of which came from that Apollo LBO, O’Shea said. The company reported March 29 that losses widened to $147.6 million for the quarter ended Jan. 30, from $126.4 million for the same period in 2015, an SEC filing said.

Apollo invested about $595.7 million equity as part of the Claire’s LBO, according to SEC filings. That was about 18 percent of the $3.3 billion transaction value, Moody’s said at the time.

The 18 percent was a bit more than half the 35 percent typically invested by PE firms in specialty retail LBOs during 2006 and 2007, Moody’s said in the note.

It’s unclear whether Apollo has gotten any of its money back. Claire’s doesn’t appear to have paid out any dividends to shareholders, including Apollo.

Claire’s did file to go public in 2013 but has yet to launch an IPO. At that time of the IPO filing, Apollo owned 97.7 percent of the company.

Executives for Apollo declined comment. Claire’s could not immediately be reached for comment.

Action Item: To see the Moody’s report go here.

Photo courtesy of Claire’s