Apollo-backed Claire’s Stores cuts debt but falls into selective default

Claire’s Stores Inc, the specialty retailer backed by Apollo Global Management, managed to lower its interest payments after closing a roughly $578 million debt exchange, but the company faces an unsustainable capital structure, according to S&P Global Ratings.

The Hoffman Estates, Ill., company wrapped up the distressed-debt exchange, landing it in the selective default category, the research firm said. Formerly, the company had a CC rating, which means its debt is highly vulnerable with default expected to be a virtual certainty, according to S&P’s guidelines.

Claire’s Stores was able to amend and restate the credit agreement for a Europe credit facility, which enabled the company to complete its proposed sub-par exchange offer and to make an interest payment on Sept. 21 on first-lien and second-lien notes that had been due six days earlier.

In the debt exchange and related transactions, the company’s total debt outstanding was reduced by about $396 million and debt maturities were extended.

“Investors are receiving less than what was promised on the original debt,” S&P analyst Samantha Stone said in a note. “We believe the capital structure is unsustainable and the company has near-term liquidity risk.” The company’s operating performance and cash flows remain weak, Stone said.

S&P said it would review the company’s capital structure after its debt payment. But the new rating would not likely exceed CCC, which means it’s vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments, according to S&P definitions.

Looking ahead, S&P said it’s expecting more sub-par exchanges on these issues.

As a result of the exchange offer, an affiliated holder exchange and a May 2016 agreement with Apollo to exchange subordinated notes for payment-in-kind subordinated notes, the company said it will realize annual cash interest savings of about $42 million.

All told, Claire’s Stores canceled $573.9 million aggregate principal amount of notes and replaced by $177.8 million aggregate principal amount of term loans, including $30.9 million in Claire’s Stores term loans.

In its most recent financial update on May 25, Claire’s Stores said sales fell $20.3 million, or 6.4 percent, to $299.6 million, with lower same-store sales. Adjusted EBITDA dipped to $37 million from $37.6 million.

A spokesman for Apollo Global Management declined to comment.

Action Item: Read Claire’s financial statements here, http://bit.ly/2cNjoxB

Katie Moran (left) and Vicki Love look at dresses donated by Victoria Beckham and previously worn by her daughter Harper Beckham, as they queue outside Mary’s Living & Giving shop in the Primrose Hill neighbourhood of London on June 16, 2015. Photo courtesy Reuters/Suzanne Plunkett