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Michaels Stores' toggle notes price with weakest covenant protection in retail sector: Moody's
By Cristal Cody
Tupelo, Miss., July 24 - Michaels Stores Inc.'s $800 million offering of PIK toggle notes on Wednesday came with the "weakest level of protection" for bonds priced in the U.S. retail sector over the past year, Moody's Investors Service said in a report on Wednesday.
Michaels FinCo Holdings LLC/Michaels FinCo Inc. upsized the deal from $700 million and priced the PIK toggle notes due 2018 (Caa1/CCC+) at par to yield 7 ½% over the day.
On a scale of 1.00 to 5.00, with 1 being the strongest, the Irving, Texas-based arts and crafts retailer's notes scored an overall 4.91 covenant quality score, Moody's said.
The company's issue contains a weak restricted payments covenant, where restricted payment carve-outs exceed market median and use fixed dollar caps, the agency said.
Moody's also gave the issue the weakest score, 5.00, on the covenants for investments in risky assets, debt incurrence carve-outs and liens subordination risk, which allows any subsidiary to secure debt on its assets, while none of the subsidiaries are guarantors.
In addition, structural subordination risk and the change-of-control put covenants are weak, Moody's said.
Other retailers with some of the weakest covenant quality scores for PIK toggle note deals include Jo-Ann Stores Holdings Inc.'s $325 million offering of 9.75% senior PIK toggle notes due 2019 (Caa1/CCC+) that priced in October. Moody's assigned a 4.39 overall covenant quality score to the issue.
Petco Holdings, Inc.'s $550 million of 9.5% senior PIK toggle notes due 2017 (Caa1/CCC+) also sold in October received an overall 4.29 covenant quality score.
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