Levi's bank debt down as third quarter numbers fall short of guidance to new lenders

By Sara Rosenberg

New York, Sept. 30 - Levi Strauss & Co.'s fixed-rate and floating-rate term loan B tranches dipped by about a quarter of a point on Tuesday despite the company's release of what appeared to be relatively positive financial results for the third quarter since, according to various market sources, the financial numbers were marginally off compared to the guidance given in the company's bank book during syndication of its $1.15 billion deal.

The floating-rate debt was quoted at 102¼ bid, 102¾ offered and the fixed-rate debt was quoted at 102½ bid, 103 offered, according to a trader.

The deal broke for trading last week with the opening market on the floating-rate term loan B quoted at 102 bid, 103 offered and the paper moving up from there throughout its first day in the secondary until finally settling at 102½ bid, 103½ offered. However, at one point during that day, some market participants saw the bid reach as high as 103.125.

The 102-plus levels have primarily been attributed to the hefty coupon, call protection and Libor floor that the paper contains.

As reported Tuesday, during the third quarter, Levi's net sales rose 6% to $1.082 billion from $1.018 billion in the third quarter of 2002, gross profit was $404 million, or 37.3% of sales, compared to $414 million, or 40.7% of sales, in the third quarter of 2002, operating income was $98 million, or 9.1% of net sales, compared to operating income of $97 million in the third quarter of 2002, or 9.5% of sales and net income was $27 million compared to $14 million for the same period last year, an increase of 95%.

"Sales and earnings for the quarter were up, even in the face of tremendous downward pricing pressure in apparel worldwide," said Phil Marineau, chief executive officer, in a news release. "Sales from the successful introduction of our new Levi Strauss Signature brand into 3,000 U.S. Wal-Mart stores and the strength of our Asian business more than offset weakness in our European business.

"With the Levi Strauss Signature and Levi's brands, we are now segmenting the market with distinct jeanswear products to reach a much broader range of consumers where they shop," Marineau continued. "Most importantly, we're not seeing cannibalization from one brand to the other. This consumer segmentation strategy will help drive the full-year sales growth we expect to achieve in 2004."

In addition, Levi announced that it closed on its $1.15 billion credit facility, consisting of a $200 million fixed-rate term loan (Caa1/BB-) priced at 10%, a $300 million floating-rate term loan (Caa1/BB-) with an interest rate of Libor plus 687.5 basis points and a 2% Libor floor (flexed down from initial price talk of Libor plus 700 basis points during syndication), and a $650 million asset-based revolver (BB) maturing in 2007 with an interest rate of Libor plus 275 basis points.

"I am pleased to report that this week we have successfully completed a new financing arrangement consisting of a $650 million revolving credit facility and a $500 million term loan," said Bill Chiasson, chief financial officer, in a news release. "This gives us more liquidity and financial flexibility to undertake the restructuring initiatives and plant closures that we announced earlier this month. These actions will continue to help us improve our competitiveness in the market."

Bank of America was the lead bank on the deal, which replaced the San Francisco brand name clothing company's existing senior secured credit facility consisting of a $375 million revolver and $365 million term loan, as well as $110 million of debt arranged under an accounts receivables securitization.

As of Aug. 24, Levi's total debt was $2.37 billion compared to $2.31 billion as of May 25 and $1.85 billion as of the fiscal year ended Nov. 24, 2002. At quarter-end, total debt, less cash, stood at $2.29 billion compared to $2.17 billion as of May 25 and $1.75 billion at the end of fiscal year 2002. As expected, debt peaked during the third quarter primarily due to seasonal working capital needs.

Meanwhile, Allegheny Energy Inc. continues to remain a focus in the secondary as market participants are starting to react positively to last week's financial filing.

The second-lien tranche was quoted at 97½ bid, 98¼ offered by the end of the day, compared to opening levels of 97 bid, 97½ offered, according to a trader.

"Things are looking good. People are happy with the fact that they're publishing their financials. It opens the door for people who have the money to spend. [But], it picked up because there are no sellers. Basically it's bid higher but hasn't actually traded," a trader said.

Last week, Allegheny filed its 2002 annual report after a delay due to an accounting probe and said it anticipates filing its delayed quarterly results for 2003 by the end of the year. The company also said in a conference call that it will not have enough cash to pay $350 million in bank debt due next year and that it would refinance $1.45 billion in bank debt due in 2004 and 2005. Following the call, the company's second-lien term loan was quoted lower at 96¾ bid, 97¾ offered, despite the company's assertion that it would be able to raise funds in the public debt and equity markets once it is up-to-date with its financial filings.

Included in the annual report was a "going concern" qualification from the company's auditors due to non-current reporting causing non-compliance with covenants, which in turn caused $3.7 billion of long-term debt to be reclassified as short-term debt on the balance sheet.

Dynegy Inc.'s bank debt remained around par on Tuesday, unchanged by the news of an upcoming paydown as investors anticipate being taken out at that level, according to a trader.

The Houston energy company plans on repaying the remaining $194 million outstanding under its term loan B with proceeds from a $300 million senior secured notes offering priced Tuesday, consisting of an add-on to its 9.875% second priority senior secured notes due 2010 and an add-on to its 10.125% second priority senior secured notes due 2013.

In follow-up news, Sunrise Senior Living Inc. closed on its $200 million three-year revolving corporate credit facility, with no amounts currently outstanding, according to a news release.

Proceeds will be used by the Mclean, Va. provider of senior living services for general corporate purposes, including investments, acquisitions and the refinance of existing debt.

The facility replaces the company's existing $265 million syndicated revolving credit facility, which was primarily used for construction of wholly owned senior living properties.

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