Crestview Partners, a private equity firm known for its focus on financial services, has hit some bumps with its first retail investment, NYDJ Apparel LLC, the company behind Not Your Daughter’s Jeans.
Moody’s downgraded NYDJ’s debt to Caa3 from Caa1 and said the company is increasingly likely to default. Debt rated Caa is considered speculative of poor standing and subject to very high credit risk, by Moody’s definitions.
The debt rating “primarily reflects the heightened probability of default as a result of the company’s currently unsustainable capital structure and risks related to covenant compliance,” wrote Raya Sokolyanska, a vice president and senior analyst of Moody’s Corporate Finance Group.
Vernon, California-based NYDJ’s gross profit dropped more than 30 percent in the first half, Moody’s said. This caused NYDJ’s adjusted leverage to surge to more than 11x in June from mid-4x in October 2013.
Moody’s said the decline in NYDJ’s earnings stemmed from significant discounting in the department-store channel and weakness in the denim category. NYDJ produced $148 million in revenue for the year ended June 30, down 26 percent from $200 million in September 2013, Moody’s said.
In October, NYDJ amended a $50 million second-lien note to enable Crestview to buy the debt at a discount, S&P Global Ratings said at the time. The swap allowed NYDJ to remain compliant with its financial performance covenants, S&P said.
The “equity cure” also resulted in NYDJ having about $20 million on its balance sheet, Moody’s said. NYDJ also paid out a $10 million dividend to its sponsors that Moody’s said was likely used to fund the equity cure.
Moody’s doesn’t think NYDJ’s earnings will “significantly recover” by June 2017 to remain covenant-compliant, Sokolyanska said. This will leave NYDJ reliant on additional capital infusions or a covenant modification, she said.
First retail deal
In June, NYDJ named Lisa Collier, a Levi Strauss & Co executive, its president and chief executive. She succeeded Robert Skinner Jr., who resigned as president and CEO, a role he held since Crestview acquired NYDJ.
Founded in 2004 by former Goldman Sachs and Morgan Stanley executives, Crestview is known for its investment in financial services. The firm also targets the media, industrials and energy sectors.
In July, the PE firm closed its buy of RS Investments. It also owns Victory Capital, Fidelis Insurance Holdings Ltd and FBR & Co.
NYDJ is Crestview’s first investment in retail. It came from the firm’s third fund, which surpassed its $3 billion target in February 2015. Crestview, with Fund III, can “opportunistically” pursue deals outside its core sectors but only in select instances that present “compelling risk/rewards profiles,” a May 2013 investment report from Portfolio Advisors said.
Crestview declined comment. Maybrook and NYDJ could not be reached for comment.
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