German Luxury Retailer Douglas Signs $2.8 Billion Rescue Deal

Just two months ago, German beauty retailer Douglas GmbH was on the brink of a debt restructuring and closing 500 stores. Now, it’s won a multi-billion-euro lifeline.

Douglas, owned by CVC Capital Partners, has reached a 2.4 billion euro ($2.8 billion) refinancing and equity deal this week as investors put their faith in Germany’s economic re-opening.

It’s another example of the junk bond market running hot as investors clamor for anything with a yield and are willing to overlook things that would ordinarily be a red flag, like falling sales and shuttered stores -- all issues that Douglas is facing. Just a year ago, the company’s debt was trading at around a third of its face value.

“If the market is supportive of a name like Douglas then it may pave the way for other similar companies to do the same, so we could potentially see more aggressive deals come to market in the coming months,” said Jeff Mueller, Eaton Vance’s co-director of high-yield bonds, who helps manage $486 billion.

Officials at Douglas and CVC declined to comment on the refinancing.

Investors did demand higher pricing to compensate for the risk they’re taking on, and the company had to increase the size of the most expensive portion of the debt.

“As much as European leveraged finance conditions could be described as an issuer’s market right now, rising case counts and extended lockdowns in Germany, France and Italy in recent days should not be overlooked,” said Neill Keaney, a credit analyst at CreditSights in London.

Rescue Package Snapshot

  • Owners CVC Capital Partners injected 220 million euros of equity.
  • Loan package worth 600 million euros.
  • Secured bonds tranche of 1.31 billion euros.
  • Payment-in-kind notes of 475 million euros at a coupon of 9%, which give the company the option to service interest payments with more debt.

Payment-in-Kind Notes

A small group of investors that manage funds designed to take higher risk and less liquid assets looked at the deal before the sale formally started and put in significant orders for the payment-in-kind notes, according to people familiar with the matter, who declined to be identified because the information is private.

“The PIKs are much riskier, but at 9% you have a lot of income to accrue while watching the story play out,” said Mark Benbow, a fund manager at Aegon Asset Management in Edinburgh. “Importantly, for those there is no imminent risk of default now that they have managed to refinance the shorter-dated bond.”

“We have more conviction in the secured notes, the PIK is definitely one that could be volatile,” he said. Still, some say it’s not enough yield to compensate for the risks.

“I would have expected a double-digit coupon given its junior ranking in the capital structure, but the market is hunting for yield,” said Solweig Pierronnet, senior credit analyst at Spread Research in Lyon, France.

Aggressive Package

Despite the challenges it faces, Douglas persuaded investors to look beyond the pandemic to assess the company’s financials, and how much debt it can carry. The company’s adjusted earnings predictions are “very aggressive,” according to Pierronnet.

“Investors usually don’t like to price the future, but that’s a reflection of the current environment,” Spread’s Pierronnet said.

One comfort for investors: the company plans to go public in the next few years, which means it could start reducing its debt burden to prepare for a listing, said Aegon’s Benbow.

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