Leonard Green’s Sports Authority misses interest payment

Sports Authority Inc, which is backed by Leonard Green & Partners, is reportedly nearing bankruptcy after missing an interest payment.

Englewood, Colorado-based Sports Authority skipped a roughly $21 million interest payment that was due January 15 for a subordinated debt loan, Moody’s Investors Service said in a report. The retailer has a 30-day grace period to make the missed interest payment before it triggers an event of default.

The missed payment prompted Moody’s to change its outlook for Sports Authority from “stable” to “negative” and downgrade its corporate family rating to Caa3, which reflects the company’s high likelihood of default. The ratings agency considers obligations with a Caa rating in poor standing and subject to very high credit risk, according to definitions from the firm.

“The negative outlook reflects Moody’s view that there is a high probability of default that could arise from a missed interest payment past the contracted grace period in its subordinated loan agreement, as well as Moody’s view that the company may have difficulty refinancing its debt without restructuring or impairment to lenders,” the report said.

Sports Authority is trying to persuade creditors to cut its outstanding debt as it tries to avoid filing for Chapter 11 reorganization, Bloomberg reported. The retailer has at least $643 million in debt. The Deal, citing an industry source, said Sports Authority is a likely candidate for a near-term bankruptcy filing.

A Sports Authority spokeswoman confirmed that the retailer has been working with Rothschild for the past several months to evaluate its capital structure. Sports Authority has been in discussions with its lenders to explore options to strengthen its balance sheet, the spokeswoman said via email.

“Although Sports Authority currently has sufficient liquidity to conduct its business operations and to make the current interest payment on the subordinated mezzanine debt, after consultation with our senior lenders we elected not to make the interest payment while we continue these discussions,” the email said.

The deal

Sports Authority sells fitness apparel, including exercise tops and shoes, sports and outdoor equipment, through its 450 stores in 41 U.S. states. The company produced more than $2.6 billion in revenue for the year ended October 31, 2015, Moody’s said.

Leonard Green acquired Sports Authority in 2006 for about $1.3 billion. The private equity firm invested $438 million equity, or 33 percent of the total transaction, Moody’s said at the time. The investment came from the firm’s fourth fund, Green Equity Investors IV, according to regulatory filings. Fund IV, which closed at $1.85 billion in 2003, generated a net IRR of 11.6 percent and a 2x investment multiple as of June 30, according to the California Public Employees’ Retirement System, an investor in Fund IV.

A Sports Authority bankruptcy likely won’t have much affect on Green’s current fundraising efforts. The Los Angeles-based firm just increased the target of its seventh fund to $8.5 billion. All of its prior funds are first- or second-quartile, a placement agent said.

GPs typically write down the value of a challenged investment they hold for an extended period of time. “The likelihood is that the bankruptcy is more a formality at this point, and that Sports Authority on Green’s latest quarterly report was heavily written down or totally written off,” the placement source said. “If that is the case, there will be little impact on reported fund level returns.”

Leonard Green did not return calls for comment.

Action Item: Read Moody’s report on Sports Authority here: http://bit.ly/1PtlCep

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