Fitch could lower Coach

Fitch Ratings said it placed Coach, Inc.'s BBB long-term issuer default rating on Rating Watch Negative following the company’s proposed $2.4 billion acquisition of Kate Spade & Co.

The acquisition, which represents an EBITDA multiple of 9 times on an LTM basis, will be initially funded by $2.1 billion of debt comprised of terms loans and senior unsecured notes, offset by repayment of the expected $800 million six-month term loan using proceeds from $1.2 billion of excess Coach cash, in the months following the transaction close.

The acquisition is expected to close in Coach's first fiscal quarter of 2018, assuming regulatory approval.

Fitch said it anticipates a one-notch downgrade of Coach's issuer default rating to BBB- upon completion of the transaction as proposed.

“The acquisition would cause Coach's leverage to increase from the current 2.6x level to 3.7x on a pro forma basis at closing and decline to around 3.3x at the end of FY 2018 upon the repayment of the expected $800 million six-month term loan,” the agency said in a news release.

“Leverage is expected to trend to under 3.0x over the following two years on EBITDA growth.

“The anticipated rating also reflects integration risk from potential changes to Kate Spade's growth strategies, and the addition of a young, rapidly grown brand to Coach's portfolio.”

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