PE-backed Charming Charlie absorbs downgrade after weak performance

Charming Charlie, a Houston retailer backed by Hancock Park Associates, will be challenged to comply with its financial maintenance covenants over the next year in the face of weak operating performance, according to Moody’s Investors Service.

A seller of value-priced fashion jewelry and accessories for 22- to 54-year-old women, Charming Charlie operated 370 stores with revenue of $492 million as of Oct. 29. But the company’s small scale and narrow product focus are challenged by larger rivals, Moody’s said.

“The fashion jewelry and accessories market is highly fragmented, with many competitors possessing greater overall scale, product diversity, and financial resources than the company,” analyst Daniel Altieri said in a Dec. 22 research note.

Moody’s cut the corporate rating on Charming Charlie to Caa1 from B3. The Caa designation means the company’s debt is judged to be speculative of poor standing and subject to very high credit risk, according to Moody’s definitions.

While the company made a $10 million repayment of a term loan in May, further actions may be required to address its capital structure, Moody’s said.

“Moody’s anticipates Charming Charlie will need to once again address the terms of its credit facility either through a second amendment, equity contribution, or full refinancing, and believes there is heightened risk of a distressed exchange,” Altieri said.

Founder and CEO Charlie Chanaratsopon holds close to 60 percent of the equity in the business, with the rest held by investors including Hancock Park Associates, the company’s prior majority shareholder, Moody’s said.

The company held roughly $6 million of balance-sheet cash and about $26 million of availability under its $60 million ABL revolver. The company also holds a $150 million senior secured term loan, which Moody’s downgraded to Caa1 from B3.

In 2012, Hancock Park Associates gave its LPs the option to get out of Hancock Park Capital III, which raised $256 million in 2005, according to a Bloomberg report. Some LPs requested liquidity after finding out that Hancock would take longer to exit its investment in Charming Charlie than expected, the story said.

The Los Angeles private equity firm did not return an email from Buyouts.

Action Item: Hancock Park Associates, http://hpcap.com/about.php

The Charming Charlie store at 445 Fifth Avenue in Manhattan on Jan. 4, 2017. Photo by Buyouts Staff.