(CapitalStructure) SPOTLIGHT: Douglas refinancing options under scrutiny ahead of 2022 maturities and CVC exit versus investment debate.

03/03/2021 11:08

German beauty retailer Douglas is the subject of some debate among the leveraged finance community as to what the company’s options are for the looming maturities of its €2.4bn debt mountain.

With the first maturity inside 12 months and net leverage nearing 8x, there has been speculation about whether Douglas will refinance or restructure in 2021, or opt for an amend and extend style transaction, ahead of a much-mooted IPO.

The company is carrying out a bondholder identification exercise, which management said on last week’s results call was part of efforts to engage with creditors about a refinancing in the "near term". Sponsor CVC Capital Partners is also part of the refinancing discussions, the company has been keen to stress.

There was widespread speculation about CVC carrying out some form of exit before the pandemic struck, and although Douglas' continent-spanning store network was badly impacted by the shutdowns, the retailer has boosted its online sales to help maintain liquidity. Management has been under pressure to address the 2022 loan and bond wall, however.

“It will be a straightforward market refinancing,” said one restructuring advisor who has looked at the company a great deal, adding that CVC could well add in some equity to help bring leverage down.

“It’s a great business now, with double-digit online growth,” the advisor said, noting: “The strategy is to accelerate the reduction of its store footprint, and continue the online growth. CVC clearly still want it.”

However, one analyst who closely follows the credit said: “I don’t think it’s as simple as an equity cheque and a straight refinancing.” He said margins have suffered during the drive for online, and there are questions around top line growth given the risk of the group’s e-commerce cannibalising in-store sales.

He said there was a material chance of a Matalan-style “restructuring-lite” transaction that could see Douglas become the first big credit to test the new German Scheme provision introduced this year. UK retailer Matalan used a Scheme of Arrangement last year to switch interest on its pricey second lien notes to PIK toggle and subordinate a portion of the bonds.

“Douglas may be a test case for the new German law,” the analyst said. “If I am CVC and putting in new money – say €300m or €500m – then I am not just taking out bondholders. I am not just deleveraging the business; I need these guys to take some pain with me.”

In terms of timing, the analyst pointed to the RCF maturity in February next year. He said: “The issue is that Douglas is over-indexed to the Christmas quarter, but you can’t wait until this time next year. While it has time … it kind of doesn’t have time.”

Douglas is not seen to have any liquidity events, and on the Q1 ended 31 December 2020 results call, CFO Matthias Born confirmed the group had no need for any external liquidity. Cash at end-December 2020 was €459m, with its €200m RCF drawn by €135m with an incremental €75m revolver untapped. 

Net debt at 30 September was €1,981m and net leverage 7.9x based on LTM adjusted EBITDA of €250m. 

Wolfgang Felix at Sarria acknowledged that Douglas’ online business was now a powerful attraction for investors, but said the group would need to demonstrate more online growth and post-COVID stability before CVC could cash in on an IPO. 

“Douglas is nicely pureplay – it just concentrates on beauty and cosmetics,” he said. “It’s the biggest in Europe at what it does.”

“It is in the unique position of already having a lot of customers, and it can drive all those people online. The growth prospects of that online business are a lot higher than for a pureplay. Never mind the cannibalisation. We are already factoring in the closures with a one-off €100m net expense.”

Mr. Felix said the challenge for Douglas was to bridge this growth to an IPO. A messy restructuring this year would cost CVC a lot more value than the €335m they might gain from restructuring the senior notes, he said. “In terms of the refinancing, the transaction that is required now … it’s more of a bridging kind,” he added. “We have seen a lot of businesses refinanced that look a lot worse than Douglas.”

Mr. Felix compared Douglas’ position to debt manager Lowell, which refinanced its entire £2.4bn debt stack with a £1.6bn senior secured bond package in October last year after shareholders led by Permira contributed £600m of equity. Net leverage dropped by a turn via the transaction to 3.6x.

“Can CVC do something similar here? I think it’s interesting,” opined Mr. Felix, adding: “I think there is a need for some kind of transaction of that kind that allows for a meaningful gesture of goodwill from CVC, also to bring ratings back to a point where CLOs can renew.”

Douglas corporate ratings are Caa1/ CCC+ (Moody's/ S&P); the SSN are B3/ CCC+ and the SN Caa3/ CCC-, all with a negative outlook.

The first analyst added: “I think there is still a possibility that if CVC are to put money in, rather than do a straight Lowell-type refinancing, lenders will also be asked to take some pain as well. I don’t think they would be engaging in discussions with bondholders and lenders if something like that wasn’t an option.

Douglas is closing around 500 of its 2,371 (as at end-2020) shops across Europe by the end of September 2022, mainly in Southern Europe. Douglas expects an annual EBITDA contribution of around €120m from the reorganisation. However, the closures come with an estimated one-off cash charge of €94m net in FY 2020/2021 and FY 2021/2022.

Douglas was once mooted to be the first candidate to use the new German Scheme, which came into force in January this year.

Another advisor who has been monitoring Douglas said an IPO will be a factor in CVC’s consideration, with the sponsor not wanting a full-blown court process to muddy the waters before an equity sale. He said the most likely path will be a “low profile” amend and extend style transaction. “I think they will try and do an amend and extend as swiftly as possible.”

One scenario the advisor envisages is a smaller equity contribution of €30m-€40m that could finance a slightly higher bond coupon – maybe even a PIK element – as well as the maturity extension.

Under New York law, bond amendments will require the consent of at least 90% of bondholders. “Yes, that’s going to be challenging and they will need to have an offer that is attractive for the bondholders,” the advisor said. “The only way you can do that is by addressing the whole capital structure – if you push out the unsecureds, then you need to push out the secureds as well.”

He pointed out that with bond prices recovering to near-par, hedge fund distressed players will have sold out and there will not be any push from investors for an aggressive debt-for-equity swap. 

Another restructuring advisor said he did not see the need for any debt-for-equity style deal. “I spent a lot of time looking at it last year. Now, not so much, and that says it all - it’s a great business now. Would CVC Capital Partners want to put any money in? I think they probably would.”

He added that the one place in Europe it doesn’t have a presence is the UK, “so there is growth potential there”.

Michael Keppel was appointed as Douglas' chief restructuring officer in July 2020, to help “future-proof” Douglas in the COVID landscape and improve its online operations. He was formerly with Alvarez & Marsal and Alix Partners.

All Douglas stores in Germany, Austria, Poland, and the Netherlands were closed in January, and for most of February. Towards the end of February 63% of the group's stores were open.

The German scheme came into force on 1 January 2021. The new law closes the gap between consensual out-of-court restructurings and in-court restructurings; in the past, the latter could only be implemented in Germany by means of comprehensive insolvency proceedings.

It is similar to the English law Scheme of Arrangement, which sees creditors placed into separate classes and 75% consent by value of each class required for the scheme to pass. The German Scheme would allow Douglas to address its store lease obligations, and also features the availability of cross-class cram-down of dissenting creditors and shareholders.

Douglas declined to comment.

CVC declined to comment.

Recent financials

Douglas reported Q1 2020/2021 sales down 9.3% to €1,173m and EBITDA down 19.2% to €177m. Like-for-like sales fell 7.1%.

In Q1, store sales fell 28.8% to €736m (down 28.5% like-for-like), while e-commerce sales rose 74.3% to €433m.

Cash flow from operations in Q1 was €278m versus €343m prior year. Capex in Q1 was €15m versus €19m prior year.

Free cash flow was €250m versus €312m.

Matt Dickinson