S&P: Claire's Stores Inc. Downgraded To 'SD' Following Completed Debt Exchange
At the same time, we lowered the issue-level ratings on the company's senior secured second-lien debt and senior unsecured debt facilities to 'D' from 'C' and removed the ratings from CreditWatch negative. The recovery rating is '6', indicating our expectations for negligible (0% to 10%) recovery.
We affirmed our 'CCC-' issue-level rating on the company's senior secured first-lien debt facilities. The recovery rating remains '3', indicating our expectations for meaningful recovery in the event of default, at the lower end of the 50% to 70% range.
The downgrade follows the close of Claire's most recent debt exchange transaction for its second-lien and senior unsecured notes. The company is exchanging $574 million of debt for new term loans due 2021. The specific debt issues being exchanged are:8.875% senior secured second-lien notes due 2019; 7.75% senior notes due 2020; 10.5% senior subordinated notes due 2017; and 10.5% PIK senior subordinated notes due 2017. "We view this as a distressed exchange as existing holders received a material discount to the par value and we believe the company's capital structure remains unsustainable with liquidity and maturity risks next year," said credit analyst Samantha Stone. "The company was able to amend and restate the credit agreement for the Europe credit facility, which allowed the company to complete its proposed sub-par exchange offer and permit sufficient cash distributions to pay the interest payment that was due on Sept. 15 on the first-lien and second-lien notes."
We expect to review the corporate credit and issue-level ratings within the next several days when we assess the company's liquidity position, operating performance expectations, while taking into account likelihood of further debt distressed transactions. While the transaction saves the company about $24 million in annual interest expense, its operating performance and cash flows remains weak. Based on these factors, we believe the corporate credit rating will likely be no higher than 'CCC' when we re-assess the ratings. We may raise the corporate credit rating to reflect the company's ongoing default risk, but we expect to maintain the 'D' issue-level rating on the exchanged debt because we believe it is likely there will be additional sub-par exchanges on these issues.