True Religion, backed by Towerbrook, faces high default risk: Moody’s

Moody’s Investors Service downgraded Towerbrook Capital Partners-backed True Religion Apparel with the chances that the denim company may default looming higher.

Moody’s cut True Religion’s corporate-family rating to Ca from Caa2, while its probability of default fell to Caa3-PD from Caa2-PD, a Jan. 13 note said.

The Caa rating means the company is highly vulnerable to non-payment, and ultimate recovery is expected to be lower than that of higher-rated obligations, according to Moody’s definitions.

The ratings firm noted True Religion’s earnings declines and unsustainable capital structure. True Religion debt is roughly 16x management EBITDA as of October, Moody’s said. For many of its retail peers, the upper end of sustainable leverage ranges 6x to 7x, said Raya Sokolyanska, vice president and senior analyst in the corporate finance group at Moody’s.

“We think the probability of default is quite high,” Sokolyanska said of the retailer. True Religion could opt for bankruptcy or a debt restructuring or some other type of default, she said.

The company in October hired Kirkland & Ellis to explore debt restructuring options, Reuters reported. True Religion also held talks with Harry Wilson’s Maeva Group earlier in 2016, Reuters said.

True Religion, Vernon, California, is known for jeans that sell for $200 or more. The company offers sportswear and accessories for men, women and children through its 133 U.S. and 12 international stores.

True Religion was once a high-flying company; rap songs mentioned its brand, while celebrities like Colin Farrell and Jennifer Lopez could be spotted wearing True Religion jeans.

TowerBrook acquired True Religion in July 2013 in a deal valued at $824 million. TowerBrook, which invests in large and middle-market companies, was expected to invest $166 million equity in the True Religion deal, Moody’s said in July 2013.

Pricey denim fell out of favor about three years ago as the so-called athleisure trend emerged. This refers to consumers opting to wear clothing they typically use to work out, like yoga pants or leggings, in other settings. True Religion did sell non-denim items like t-shirts, hoodies and jackets prior to 2013 but decided to grow this segment in response to athleisure, Sokolyanska said.

“Women are wearing more yoga pants and they’re not wearing jeans. Although True Religion has adapted, its mainstay is jeans,” she said. Consumers are also shifting away from brick-and-mortar stores and toward Internet shopping, Reuters said.

True Religion has tried to right itself. In 2015, it hired a new CEO, John Ermatinger. It closed unprofitable stores and introduced new supply chain and e-commerce initiatives.

Moody’s, however, expects only modest earnings improvement in 2017 and 2018, which won’t allow it to generate positive free cash flow and cut leverage to a sustainable level prior to its term-loan maturities, Moody’s said. True Religion is also struggling with $470 million in term-loan debt, Sokolyanska said.

True Religion, Moody’s said, has “very limited prospects for a meaningful operating performance turnaround in the next several years that would allow it to reduce leverage to a sustainable level.”

Moody’s expects the company to have weak liquidity over the next 12 to 18 months. The company produced about $377 million in revenue for the year ended October 2016, Moody’s said.

True Religion and TowerBrook could not be reached for comment.

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True Religion store at 863 Broadway in Manhattan on Jan. 25, 2017. Photo by Buyouts Staff.