Michaels Junk Bond Gets Investor Pushback on Tariff Concerns
Michaels Stores was forced to pay up to refinance existing debt, the latest unintended victim in the ongoing U.S.-China trade war.
(Bloomberg) -- Michaels Stores Inc. was forced to pay up to refinance existing debt Friday, the latest unintended victim in the ongoing U.S. trade war with China.
Credit investors were concerned about disappointing financial results from earlier this month, as well as the potential for Michaels to be hurt by tariffs the U.S. is set to impose on Chinese imports. That had them asking for better terms.
The yield on the company’s $500 million offering came in at 8%, higher than the original price discussions of around 7% when the deal was first marketed earlier this week, according to people familiar with the matter who aren’t authorized to speak publicly.
Some investor protections -- such as restrictions on dividend payments and asset sales -- were also strengthened, the people said.
Tariff concerns are another headwind in an already challenged retail sector. That’s weighing on Michaels, which had weathered those problems better than others, and was able to lower pricing on its term loan in May 2018.
“High-yield retail is just a difficult place to raise money at present, particularly for companies with little organic growth and margin compression,” said Noel Hebert, a Bloomberg Intelligence analyst. “The momentum of the business is rolling over and the potential implications of tariffs on Chinese imports make this business not the best place to be in.”
Company executives said during their first-quarter earnings conference call they are trying to offset the potential impact of tariffs by moving production outside of China. The company also cut their adjusted earnings per share forecast for the year, and said comparable store sales may decline again for a third straight quarter.
This week the company saw the price for its first-lien loan due in 2023 fall to an all-time low bid of 95.875, according to data compiled by Bloomberg.
To be sure, this isn’t the only deal to have struggled in the high-yield market this week as investors have become pickier.
An 8% yield on the new Michaels bond, rated B1 by Moody’s Investors Service and B by S&P, will increase the company’s interest costs as proceeds will refinance an existing bond maturing next year that pays lower interest of 5.875%. The yield is also significantly higher than the average Single B rated bond, which yields 5.75%, according to Bloomberg Barclays index data.
--With assistance from Boris Korby.
To contact the reporters on this story: Lisa Lee in New York at llee299@bloomberg.net;Gowri Gurumurthy in New York at gurug@bloomberg.net
To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Adam Cataldo
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