LPC: Office Depot's M&A loan hits turbulence in retail sector

Compucom Software

27/10/2017 16:16

By Jonathan Schwarzberg and Andrew  Berlin 
    NEW YORK, Oct 27(Reuters) - A US$750m leveraged loan for 
publicly-traded US office supplies retailer Office Depot is 
testing sentiment to the retail sector as online competition, 
the threat of further technological disruption and rising 
default rates make investors think twice about lending. 
    The threat from online retailer Amazon was highlighted on 
Tuesday when an announcement about the ecommerce giant's 
Business Prime Shipping service for users with Amazon Business 
accounts hit rival Staples secondary loan and bond prices.  
    Staples' US$2.9bn loan, which backed the 
business-to-business part of its August buyout by private equity 
firm Sycamore Partners, fell to 96% of face value from 99% to 
yield roughly 6.75%. 
    The company's US$1bn 8.5% bonds fell to 90 from around 95, 
sending yields above 10%, creating a difficult backdrop for 
Office Depot's loan. 
    "This is a sector that no one wants to touch," a debt 
investor said. "Amazon's rapid evolution of technology has 
really sped up the decline of retail. Defaults in retail are 
typically a slow burn, but they may end up going a lot faster." 
    The US retail sector is currently topping the default list. 
The bankruptcy filing of Toys R US in September boosted the 
retail default rate to 7.3% and Fitch estimates that it could 
hit 10% in 2018. 
    Goldman Sachs is leading Office Depot's deal, which finances 
its roughly US$1bn purchase of information technology services 
company CompuCom.  
    The deal is offering investors a spread of 500bp-525bp and 
commitments are due on October 31. The average secondary spread 
on B1-rated loans is currently 386bp, according to Thomson 
Reuters LPC. 
    The loan offers investors a relatively high coupon for a 
company that will generate a combined US$234m of unlevered free 
cash flow (roughly 23% of debt) and has low leverage of 1.3x 
Ebitda. 
    Bookbuilding has been slow and investors are already seeking 
concessions, a prospective lender said.  
    The company's sales fell 10.7% from 2015 to the last 12 
months ending in June 2017, according to regulatory filings. 
Office Depot said that it expects sales in 2017 to be lower than 
2016 due to store closures and challenging market 
conditions. CompuCom's sales have declined 10.6% since 2015. 
    "It's hard to get excited about two declining businesses," a 
second investor said. 
    After its failed merger with Staples in 2016, Office Depot 
has been trying to streamline its business by shutting 
underperforming stores and cutting procurement and overhead 
costs. 
    Lenders are worried about Office Depot's restricted payments 
capacity and its ability to incur additional debt, which as 
currently proposed could allow leverage to rise above the level 
at the acquisition's close. Incremental debt as currently 
proposed would cap senior secured leverage at 1.5 times. 
    The combination of the companies will create only US$40m in 
synergies, for a company with a combined US$790m in Ebitda which 
leaves little room for error in operation, a third investor 
said. 
    Office Depot has a liquidity cushion in the shape of a 
US$1.2bn asset-based lending facility. The company also has 
US$537m of cash on hand.   
    Goldman Sachs declined to comment. Office Depot did not 
return a request for comment. 
 
 (Reporting by Jonathan Schwarzberg and Andrew Berlin; Editing 
By Tessa Walsh and Michelle Sierra) 
 
Keywords: OFFICEDEPOT LENDING/