(Editor's note: The Debt Restructuring Snapshot is a new publishing format that highlights key aspects of U.S. LMTs (liability management transactions), specifically focusing on transactions where existing lender recoveries were impaired and not all lenders experienced the same impact. We provide a summary of the transaction, changes to the capital structure, the mechanics of the transaction, and the impact on recoveries and liquidity.)
| Obligor profile | ||||
|---|---|---|---|---|
| Restructuring date | November 2024 | |||
| Post-exchange rating/outlook | CCC+/Negative | |||
| Location/Primary industry | U.S./Retail | |||
| Post-exchange total reported debt (change) | $634 million ($58 million higher) | |||
| Sponsor/owner | Charlesbank | |||
| Forecasts (fiscal year end 2024)* | ||||
| Liquidity ratio (x)/Assessment: | 2.6/Adequate | |||
| Debt to EBITDA* (x) | About 17x | |||
| EBITDA to total interest* (x) | <1 | |||
| EBITDA to cash interest* (x) | <1 | |||
| *Adjusted by S&P Global Ratings. GICS--Global Industry Classification Standard. Source: S&P Global Ratings. | ||||
Transaction Summary
Restructuring type: Collateral/asset transfer/priming/double dip
Priming: Empire Today raised $100 million of new first-out money, backstopped by an ad hoc group of term loan lenders. The ad hoc group of term loan lenders—representing over 80% of term loans outstanding--committed $82 million of new money on a first-lien, first-out basis to newly created subsidiary Empire Today IP LLC.
Collateral/asset transfer: As part of the debt exchanges, Empire today transferred certain of the company’s federal trademark registrations, certain U.S. copyright registrations and all proprietary rights in certain software to a new excluded subsidiary Empire Today IP LLC (NewCo).
Double dip : NewCo's lenders benefit from the transferred collateral and a secured intercompany loan from NewCo to RemainCo (giving them an indirect claim to RemainCo’s value) and a first-lien secured guarantee of NewCo's debt from existing borrowers and guarantors (giving them a second, direct claim to RemainCo’s value). Discounts to par differed in each exchange.
| Empire Today--Original debt structure | |||||||
|---|---|---|---|---|---|---|---|
| Original debt structure | Exchange prices | Effective ranking in waterfall | Maturity (year) | Rate (%) | Principal (mil. curr) | Pre-exchange prices* | Recovery estimates (%) |
| $60 million first-lien RCF | Par | 1 | 2026 | S+500 | 41 | 40 | |
| First-lien term loan | Various | 1 | 2028 | S+500 | 576 | 61 | 40 |
*Prices are based on indicative mid-price.
| Empire Today--Post-exchange debt structure | |||||||
|---|---|---|---|---|---|---|---|
| Post-exchange debt structure: | Exchanged from* | Effective ranking in waterfall | Maturity (year) | Rate (%) | Principal (mil. curr) | Prices (on Nov. 25, 2024*) | Recovery estimates (%) |
| $60 million first-out RCF | RCF | 1 | 2029 | S+5.50 | 0 | N/A | 95 |
| First-out term loan | First-lien term loan | 1 | 2029 | S+5.50 | 208 | 100.5 | 95 |
| Second-out term loan | First-lien term loan | 2 | 2029 | S+5.00 | 426 | 69.5 | 10 |
*Prices are based on indicative mid-price. S--Secured overnight financing rate. N.A.--Not available. Source: S&P Global Ratings.
Transaction Mechanics
The lenders under the Empire Today IP LLC credit agreement will benefit from tightened covenants, additional reporting requirements, and enhanced protections against future liability management exercises (LMEs) relative to the existing Empire Today LLC credit agreement, while representations, warranties, and covenants were largely removed from the amended Empire Today LLC credit agreement.
Impact On Recovery
Our estimated enterprise value at default (which is largely consistent with our pre-exchange valuation) will fully cover the reduced first-out claims, with some residual left for second-out claims.
The impact on pre-exchange 1L recovery prospects is relatively complex due to varying par haircuts taken by ad hoc and other term lenders and the mix of new term loans with differing repayment priorities received by the lenders.
Revolving credit facility (RCF) lenders are well positioned since they did not take a par haircut and any future exposure will be in a first-out position, with a maximum amount of first-out claims of about $270 million versus $636 million prior to the exchange. Our recovery rating on this debt is ‘1’ (rounded estimate: 95%) versus ‘4’ prior (40%).
Ad hoc lenders took an approximate 6% par haircut and exchanged their $471 million of pre-exchange exposure into $94 million first-lien, first-out term loans (recovery rating of ‘1’; rounded estimate: 95%) and $347 million second-out term loans (recovery rating of ‘5’; rounded estimate: 10%). Blended recovery expectations for the group after accounting for the par haircut and revised recovery expectations following the exchange approximate 25%; this compares to 40% prior to the exchange. This recovery comparison pre- and post-exchange does not incorporate the new money, which has an expected recovery of 95%.
Non-ad hoc group participating lenders agreed to an approximate 20% par haircut and exchanged their $106 million pre-exchange exposure into $6 million first-lien, first-out term loans and $79 million second-out term loans. Estimated blended recovery for non-ad hoc lenders approximates 10% as compared to 40% prior to the exchange and 25% blended recovery for ad hoc group lenders post exchange.
Impact On Liquidity
Post exchange, the company had approximately $100 million of liquidity including approximately $40 million of cash on balance sheet and undrawn $60 million revolver due 2029.
We view Empires Today’s liquidity as adequate. We estimate liquidity sources will exceed uses by more than 2.6x over the next 12 months. While quantitative aspects of the company's liquidity profile qualify it for a stronger assessment, we do not believe it meets certain qualitative characteristics. For instance, we do not view the company as maintaining a satisfactory standing in the credit markets given the company's recent distressed debt restructuring transaction. Additionally, we do not believe the company has the ability to absorb high-impact, low-probability events without refinancing.
The company's revolving facility has a springing leverage ratio covenant of 21.6x starting in March 2027, which will be tested if utilization is above 40% of the committed amount. We do not expect the covenant to be tested over the next 12 months
This report does not constitute a rating action.
| Primary Contact: | Olen Honeyman, New York 1-212-438-4031; olen.honeyman@spglobal.com |
| Secondary Contact: | Frederico Carvalho, CFA, San Francisco 1-415-371-5071; frederico.c@spglobal.com |
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