New Look Bondco I plc (sr secured 2018) NEWLOK
May 03, 2013 - 2:10pm EST by
opco
2013 2014
Price: 100.00 EPS $0.00 $0.00
Shares Out. (in M): 1 P/E 0.0x 0.0x
Market Cap (in $M): 1 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

  • Retail
  • UK based
  • Management Change
  • Turnaround
  • Undervalued Bond

Description

CREDIT CAN ONLY BE PURCHASED BY 144A/REG-S investors.  
 
This dea is pricing soon so I will make this writeup very brief.  None of the information below is private, no CA has to be signed.  To get more information, GS or JP Morgan should be contacted as they are the joint bookrunners on the transaction.  
 
Quick thesis
 
New Look is a UK retailer which is issuing 1st lien sr secured debt with approximately 3.6x net leverage.  Though my valuation of the company is not based on EBITDA metrics per se, my valuation equates to 6.5x EBITDA.  The credit is expected to price at 8.65% and I expect it to trade to a 7% yield providing a return in the teens over the course of the next 12 months.  
 
Ownership
 
Apax and Permira combined over 50% of the business, and the remaining ownership is roughly split between the founder and management.  
 
Business Description
 
New Look is a fast fashion retailer which basically copies popular designs and then has them produced on its behalf and then rolled out into its stores as quickly as possible.  While not known in the US, it is very well known in the UK.  The company has stores in the UK and Europe, franchise stores, as well as a growing online presence.  Total store count is over 1,100.  The company is the #1 value retailer for women's clothing and accessories market in the UK.  Largest UK retailer by volume for women's jeans.  #2 value retailer for women's clothing and accessories in the UK.  #1 value retailer for women under 35s footwear in the UK.  13 million pairs of shoes were purchased from New Look by UK customers in FYE March 2012.  The Annual Report is on the New Look website.    
 
Leverage
 
Net leverage through the senior secured notes is 3.6x.  The debt below our tranche is PIK debt, so it is essentially equity from our perspective.  My analysis shows that EBITDA can fall from 198 million to 110 million, and we would still be covered.  The company should still be FCF generative with EBITDA above 125 million.  
 
Positives
 
This is a brand well know in the UK and has a reason to exist.  
 
Management has been executing a turnaround which has meaningfully increased EBITDA, in the absense of a sales uplift.   
 
Low maintenance capital expenditures, and business is cash generative, esp given the PIK.  
 
New CEO which started in January 2013 who is talented and has relevant experience.  
 
Negatives
 
Levered UK retailer, weak economic environment, meaningful operating leverage.  
 
PE sponsors have already taken more out of the business than they have originally invested.  
 
Turnaround
 
Adjusted EBITDA was 200 million in FY 2008, 218 million in 2009, 249 million in 2010, 190 million in 2011, and 147 million in 2012.  LTM through December 2012 it is 198 million.  During this time, the sales environment has been weak, although same store comps have stabilized.  The growth in sales which occurred in the first few years after 2008 was due to higher store counts.  An analysis of estimated sales/sq ft will show that productivity has been declining for a few years.  
This is partly due to a weak UK environment, but also due to poor execution and poor management of stores.  
 
The recent improvement in EBITDA has been based on the following: 

Paring headcount at the store level.  Managing hours better.  
 
Company now has 9% less inventory in stock - much improved inventory management which has led to dramatically lower markdowns.  This is visible in the improved gross margin line.  
 
Company has been closing stores which are not profitable or are marginally profitable upon lease expiration.  
 
New Look has been selectively refurbishing stores and getting high returns on them.  The payback is approximately 2 years and the sales uplift from a refurbishment is around 9%.  
 
Conclusion

I expect the credit to trade well post-issuance, and the risk-adjusted return is very attractive.  In an environment where the credit is impaired, equities will have done meaningfully worse.  Additionally, the credit is 5 yr paper and has a 800 bps spread, so we will not be overly exposed to rising rates.  There is a EUR floating tranche which can be purchased by investors to be fully hedged against rates.  
 
 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Continued cost effciencies reducing leverage multiples.  
 
Secondary market realizing the credit comps very favorably to bank debt and high yield in general.  
 
Eventual IPO.  New Look was originally planning on going public a few years back but then the numbers started declining and that was off the table.  
    sort by    

    Description

    CREDIT CAN ONLY BE PURCHASED BY 144A/REG-S investors.  
     
    This dea is pricing soon so I will make this writeup very brief.  None of the information below is private, no CA has to be signed.  To get more information, GS or JP Morgan should be contacted as they are the joint bookrunners on the transaction.  
     
    Quick thesis
     
    New Look is a UK retailer which is issuing 1st lien sr secured debt with approximately 3.6x net leverage.  Though my valuation of the company is not based on EBITDA metrics per se, my valuation equates to 6.5x EBITDA.  The credit is expected to price at 8.65% and I expect it to trade to a 7% yield providing a return in the teens over the course of the next 12 months.  
     
    Ownership
     
    Apax and Permira combined over 50% of the business, and the remaining ownership is roughly split between the founder and management.  
     
    Business Description
     
    New Look is a fast fashion retailer which basically copies popular designs and then has them produced on its behalf and then rolled out into its stores as quickly as possible.  While not known in the US, it is very well known in the UK.  The company has stores in the UK and Europe, franchise stores, as well as a growing online presence.  Total store count is over 1,100.  The company is the #1 value retailer for women's clothing and accessories market in the UK.  Largest UK retailer by volume for women's jeans.  #2 value retailer for women's clothing and accessories in the UK.  #1 value retailer for women under 35s footwear in the UK.  13 million pairs of shoes were purchased from New Look by UK customers in FYE March 2012.  The Annual Report is on the New Look website.    
     
    Leverage
     
    Net leverage through the senior secured notes is 3.6x.  The debt below our tranche is PIK debt, so it is essentially equity from our perspective.  My analysis shows that EBITDA can fall from 198 million to 110 million, and we would still be covered.  The company should still be FCF generative with EBITDA above 125 million.  
     
    Positives
     
    This is a brand well know in the UK and has a reason to exist.  
     
    Management has been executing a turnaround which has meaningfully increased EBITDA, in the absense of a sales uplift.   
     
    Low maintenance capital expenditures, and business is cash generative, esp given the PIK.  
     
    New CEO which started in January 2013 who is talented and has relevant experience.  
     
    Negatives
     
    Levered UK retailer, weak economic environment, meaningful operating leverage.  
     
    PE sponsors have already taken more out of the business than they have originally invested.  
     
    Turnaround
     
    Adjusted EBITDA was 200 million in FY 2008, 218 million in 2009, 249 million in 2010, 190 million in 2011, and 147 million in 2012.  LTM through December 2012 it is 198 million.  During this time, the sales environment has been weak, although same store comps have stabilized.  The growth in sales which occurred in the first few years after 2008 was due to higher store counts.  An analysis of estimated sales/sq ft will show that productivity has been declining for a few years.  
    This is partly due to a weak UK environment, but also due to poor execution and poor management of stores.  
     
    The recent improvement in EBITDA has been based on the following: 

    Paring headcount at the store level.  Managing hours better.  
     
    Company now has 9% less inventory in stock - much improved inventory management which has led to dramatically lower markdowns.  This is visible in the improved gross margin line.  
     
    Company has been closing stores which are not profitable or are marginally profitable upon lease expiration.  
     
    New Look has been selectively refurbishing stores and getting high returns on them.  The payback is approximately 2 years and the sales uplift from a refurbishment is around 9%.  
     
    Conclusion

    I expect the credit to trade well post-issuance, and the risk-adjusted return is very attractive.  In an environment where the credit is impaired, equities will have done meaningfully worse.  Additionally, the credit is 5 yr paper and has a 800 bps spread, so we will not be overly exposed to rising rates.  There is a EUR floating tranche which can be purchased by investors to be fully hedged against rates.  
     
     
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Continued cost effciencies reducing leverage multiples.  
     
    Secondary market realizing the credit comps very favorably to bank debt and high yield in general.  
     
    Eventual IPO.  New Look was originally planning on going public a few years back but then the numbers started declining and that was off the table.  
      Back to top