Beauty retailer Douglas ups bond portion of jumbo refi

Updates with banker comment

By Eleanor Duncan

LONDON, Mar 24 (IFR)

German beauty products retailer Douglas upped the bond portion of its refinancing and sent out initial price thoughts on Wednesday, as some market players raised eyebrows at the company's Ebitda adjustments.

The company is shopping a €2.7bn refinancing, consisting of loans and bonds, as it looks to rejig its debt stack and kick-start its business transformation plan in the wake of the pandemic. Sponsor CVC Capital Partners is ushering the financing along with a €220m equity cheque, in a leaf taken out of Lowell's playbook for its jumbo refi last year. 

Douglas on Wednesday rejigged the structure of the refi, downsizing the loan and increasing the size of its senior secured notes on offer. 

The company is now marketing a €750m (versus €1.08bn) first lien senior secured five-year term loan at initial price thoughts of Euribor plus 500bp and a €1.33bn (versus €1bn) five-year non-call two fixed-rate senior secured bond at 5.5%. The size of the PIK 5.5-year non-call two note component has remained unchanged at €300m, and IPTs are 9%.

The terms of the PIK notes give the issuer sole discretion either to pay interest in cash or to pay PIK interest – i.e., issuing additional senior PIK notes, according to deal documents seen by IFR.  

Some investors saw IPTs on the senior secured notes coming a little slim given the company's paper was seen trading as low as 23.75 cents on the dollar less than a year ago. Still, they said its shift to online has good prospects. 

"The SSNs are coming mid-5s, but those bonds we believe are well covered under an event of default," said a high-yield investor who said he liked the deal.

"The PIKs are much riskier, but at 9% you have a lot of income and there is no imminent risk of default now that they have managed to refi the shorter-dated bond. So it should be a business that has a lot of breathing room now to continue to its move to online – which is worth higher multiples – as well as reducing their fixed overheads by rationalising the store footprint."

Douglas is going to repay its €300m 6.25% senior secured bonds due 2022 and its €335m unsecured 8.75% senior 2023s at par – as well as repaying its €1.37bn term loan.

Analysts and investors remarked on the scale of the Ebitda adjustments the deal was being marketed with, which CreditSights analysts said price in around €119m of cost savings and strips out the Covid-afflicted trading across all of 2020.

"Douglas ... is selling its refinancing off a 'management-adjusted Ebitda' figure that is based on a high degree of speculative adjustments in the form of assumptions, run-rate recoveries in revenues (based off sales between June and October 2020) and the successful execution of its store optimisation programme," wrote CreditSights analysts in a report published on Tuesday.

"The bottom line is that the presented figure of €395m management-adjusted Ebitda is 3.5 times higher than the [last 12 months] to December 2020 reported Ebitda figure of €112m." wrote analysts. 

Without the adjustments, net leverage would stand at 7.2x on the senior secured notes, versus the 4.8x based off of the management-adjusted Ebitda, said CreditSights. 

"More broadly, I think investors always scrutinise Ebitda to make sure they are comfortable with the adjustments," said a banker on the deal.

"For some of the more Covid-impacted credits, the scale of the adjustments is quite large now which will draw extra scepticism. But in those cases I think investors are buying the business more so than the last twelve months' Ebitda, so it all comes down to an investor's conviction that the business will return to 'normal' performance within a reasonable time frame."

The high-yield investor said that he said that he believed in Douglas's turnaround.

"Yes, there are lots of Ebitda adjustments, but the business is going in the right direction and [there is] plenty of equity below the debt," he said. "The business was bought for greater than nine times and the sponsor is now putting in even more equity. They will probably look to IPO the business in a few years to get their money out but to do so they will need to deleverage it by a lot."

Goldman Sachs (B&D), Deutsche Bank and UniCredit are joint global coordinators, while BNP Paribas and UBS are joint bookrunners. Leads kicked off investor calls on Thursday March 18.

The refinancing will improve Douglas's liquidity by addressing its upcoming debt maturities in 2022, increasing cash on its balance sheet by almost €100m and putting in place a new €170m RCF, said Moody's analysts.

The agency has assigned a B3 corporate family rating to Kirk Beauty Two (the new parent company of Douglas) and the senior secured notes, and has given the PIK notes a Caa2 rating.

Credit analysts are seeing the refi as a positive for bondholders – the company's 8.75% July 2023s traded as low as 23.75 cents on the dollar in May amid pandemic-related concerns, according to MarketAxess data.

"We now see a fast deleveraging of the company to below 5.0x by the end of full year 2021, underpinned by the acceleration of Ebitda growth thanks to a growing top line and improved margins," said Spread Research analysts.

(Reporting by Eleanor Duncan, editing by Philip Wright, Alex Chambers)

((Eleanor.Duncan@refinitiv.com; +44 7827 252612))