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Why retailer New Look is looking good after improvement in leverage

Publication Date: 14 May 2019 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav Sharma (Associate Editor ReachX)
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Thematic Accounting Convertibles Private Equity UK EU ex-UK Asia ex-China Consumer

It has been quite a start to 2019 for retailer New Look. Headquartered in London and Weymouth, the self-styled value fashion retailer selling a range of apparel, accessories and footwear, primarily aimed at women aged 16 to 45, was staring at a much needed restructuring last year. That's understanable in an evolving retail climate that even has heavyweight retailers like Next Plc examining their strategy

On 14 January, New Look announced it would allocate new “notes and shares to creditors” on 3 May 2019, in place of the note obligations previously due. The idea was to instill confidence early on in the first quarter and it appears to have worked, backed up by actions of the management. 

The company claims to have slashed its long-term debt by 80% to £350m and repaid its £80m bridge facility. However, what appears more significant is that New Look has materially reduced its gross debt to £1.4bn from £2.3bn; a much needed lowering of nearly a billion pounds benchmarked against its most recent trading statement. That statement revealed the company returned to a group operating profit of £38.5m for the 39 weeks to 22 December 2018, from an operating loss of £5.1m in same period in 2017.

As things stand, New Look has significantly improved its leverage position to 7.7x from 12.3x, deemed impressive by Moody's. As a consequence, the rating agency has upgraded to Caa2 from Ca the corporate family rating (CFR) and to Caa2-PD/LD from Ca-PD the probability of default rating (PDR) of the retailer.

Roberto Pozzi, lead analyst for New Look at Moody’s, says there is potential for “further upgrade.” 

"While we saw New Look's distressed exchange as a default, the subsequent financial restructuring has significantly improved its leverage. Furthermore, Moody's calculates that leverage, measured in terms of our adjusted gross debt to EBITDA based on unaudited accounts for the last twelve months to 22 December 2018 and pro-forma for the financial restructuring plan just completed, has reduced to 7.7x from 12.3x. We expect the company to continue to reduce costs and currently anticipate leverage of 6.3x in 2019.”

Big question is where from here? Moody's anticipates a positive rating pressure following the satisfactory review of the final capital structure. Upward rating pressure may arise following a satisfactory review of the post-restructuring business plan and capital structure, as well as the company's financial policies, including liquidity arrangements. 

“Downward pressure on the ratings could arise from further deterioration in operating performance leading to an increase in leverage, or a weakened liquidity profile or renewed covenant pressure,” the agency concluded. 

All that as High Street shops incrementally take a backseat to online sales; a fact not lost on New Look as it beefs up its e-commerce offering. The company shuttered 90 UK stores in 2018, along with 12 in Indonesia, but continues, like many of its peers, to invest in its online platform. Portfolio optimisation in step with improved leverage should give heart to its debt holders in this cutthroat retail landscape. 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma (Associate Editor ReachX)

 

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