Gap Prices $2.25 Billion Junk Bond to Shore Up Liquidity
Gap Seeks $2 Billion From Junk Bond Sale to Shore up Liquidity
(Bloomberg) -- Gap Inc. raised $2.25 billion in the junk bond market on Thursday, up from $2 billion originally, as the clothing retailer looks to shore up liquidity amid disruption caused by the coronavirus, according to people familiar with the matter.
The company priced a $500 million offering of three-year notes at 8.375%, $750 million of five-year bonds at 8.625% and $1 billion of seven-year notes at 8.875%, and all three were at par, the people said, asking not to be identified because the matter is private. That is about one-eighth a percentage point less than price talk for each tranche. Pricing was originally discussed in the low 9% area for the five-year, and plus or minus 25 basis points for the other two tranches, according to the people.
The bonds will be secured by a first-priority claim on the company’s real estate, intellectual property and equity interests of some domestic units, the people said. Lenders would also have second-priority claim on other assets.
Proceeds will be used to refinance existing notes maturing next year, repay outstanding amounts on the company’s revolving credit line and for general corporate purposes.
Gap’s existing $1.25 billion 5.95% senior unsecured notes maturing in April 2021 jumped Wednesday by almost seven points to trade at 103.375 cents on the dollar, following the news that proceeds from the new deal would refinance the debt, according to Trace data.
The deal repays the $500 million drawn on the existing revolving credit facility, and Gap is meanwhile signing a new revolver for up to $2 billion in conjunction with the deal, Moody’s Investors Service said in a report Thursday.
Read more: Gap debt’s cheap unless shutdown stretches
A representative for Morgan Stanley, which led the deal, declined to comment. A representative for Gap didn’t respond to a request for comment.
The retailer had been in discussions to issue new bonds as one financing option to get it through the pandemic, Bloomberg News reported earlier this week.
Both Moody’s Investors Service and S&P Global Ratings downgraded Gap by one notch on Thursday, to the second- and third-highest rungs of high yield, respectively. Both assigned the second-highest junk rating to the new secured bonds.
Moody’s had cut Gap by two notches into junk just last month, and in its new downgrade cited the new transaction that, even though it improves liquidity, adds leverage and ties up a significant portion of assets. S&P expects revenue to decline by more than 30% in 2020 and to rebound in 2021 to lower levels than 2019 due to the virus, according to its downgrade report.
The company said in a regulatory filing Thursday that it may pursue a combination of new debt financing or other short-term credit facility in order to preserve liquidity over next 12 months. It expects to have $750 million to $850 million of cash equivalents at the end of the fiscal quarter ending May 2.
“We are facing a period of uncertainty regarding the ongoing impact of the Covid-19 pandemic on both our projected customer demand and supply chain,” the company said in the filing. “We expect material impacts from the evolving Covid-19 pandemic, including further spread in other regions, meaningful deterioration from current trends, and potential disruption from any supply chain impacts.”
Gap has taken steps to preserve its balance sheet and counter expected losses from store closures. It deferred its April dividend payment to shareholders and suspended some rent payments. The retailer also drew down all of its $500 million revolving credit facility.
The retailer values its non-retail real estate assets at more than $1.4 billion, and is in talks with its bank lenders about obtaining asset-based loans, Chief Financial Officer Katrina O’Connell said on a conference call earlier this month.
Gap had $1.7 billion of cash, cash equivalents and short-term investments as of Feb. 1, according to the filing.
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