Eddie Bauer to begin discussions with holders on possible conversions

By Jennifer Lanning Drey

Portland, Ore., April 8 - Eddie Bauer Holdings, Inc. will begin reaching out to its convertible noteholders over the next few weeks to discuss possible terms for conversion of their notes, Neil Fiske, chief executive officer of Eddie Bauer, said Wednesday during the company's fourth-quarter earnings conference call.

The planned discussions relate to an April 2 amendment signed between the company and its term loan lenders that provides covenant relief to the company, as well as provides it 90 days to improve the capital structure before the escalation of payment-in-kind interest and additional warrants.

As previously reported, as part of the amendment, the company is required to either retire or convert a significant percentage of its convertible notes or raise $50 million in new capital, with net proceeds used to repay term loan debt.

"While the amendment provides us short-term financial relief, our longer term goal is to improve our capital structure by substantially reducing our long-term debt," Fiske said.

If the noteholders agree to convert, Eddie Bauer will begin exploring the possibility of reducing long-term debt by raising additional equity, Marv Toland, chief financial officer of Eddie Bauer, said during the call.

"This covenant relief benefits the company by providing us with the flexibility to work with the convertible noteholders to discuss possible conversion terms and allowing us time to explore other options to reduce our long-term debt," Toland said.

Not a liquidity issue

During the call, Toland emphasized that the amendment is related to covenant compliance but does not indicate a liquidity problem for the company.

"This issue facing us was compliance with the tightening of our leverage and fixed-charge ratio covenants," he said.

Fiske said the company was compelled to negotiate the amendment in order to gain operating flexibility and the ability to get a clean opinion on financial flexibility from its auditors.

"We acknowledge that the price of this flexibility is very high and well above what would have been considered market rates even a year ago. Given the dislocation in the credit markets, we believe it was the best available option to the company and its stakeholders," Fiske said.

Eddie Bauer said it had already submitted two previous proposals on amending its term loan, both of which were not approved, before reaching this agreement.

As of April 8, Eddie Bauer owed its senior term loan lenders $191.5 million in outstanding principal, consent fees due in November and payment-in-kind amendment fees, Toland said.

If the convertible noteholders do not agree to covert their notes and the company is unable to raise new capital over the next 12 months, the cost of the amendment would include an estimated $40 million to $45 million in outstanding principal balance from payments-in-kind and payment-in-kind interest, $10 million to $14 million of additional cash interest payments and fees, and ownership of 49.9% of common stock.

"We understand how expensive this amendment is. Our goal is to create a window where long-term debt can be reduced via the conversion of the convertible notes to common stock and/or raising new equity before additional major escalation of term loan costs," Toland said.

Eddie Bauer had cash and cash equivalents of $60.4 million at Jan. 3.

Revised covenants

Through the amendments, the senior secured leverage ratio covenant related to the term loan was eased through the fourth quarter of 2009, and the fixed charge covenant ratio was also eased, Toland said.

Specifically, he said the new compliance ratios for the senior secured leverage ratios are 6.25 to 1 for the first quarter, 8.0 to 1 for the second quarter, 9 to 1 for the third quarter and 7.75 to 1 for the fourth quarter.

The prior levels were 4 to 1 for the first and second quarters, 3.75 to 1 for the third quarter, and 3.25 to 1 for the fourth quarter.

Eddie Bauer said the relief was necessary because it believes 2009 will be another difficult year with first-quarter revenues projected to decline by 15% versus the prior-year period.

The company experts to see improvement in each successive quarter but expects comparable-store sales to remain negative until at least the fourth quarter of 2009, he said.

Eddie Bauer's fourth-quarter revenues decreased by $22.5 million to $369.9 million, compared to $392.4 million in the fourth quarter of 2007. Comparable-store sales fell 5.7% for the quarter excluding the effect of foreign exchange rates resulting from the decline in the Canadian dollar.

The net loss for the period was $127.5 million, compared to a net loss of $18.2 million in the year-ago quarter.

Eddie Bauer is a Seattle-based specialty retailer that sells outerwear, apparel and accessories.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.