Charlotte Russe, which runs a flagship brand and the Peek Kids brand, on Friday announced a restructuring support agreement with creditors over 98% of its term loan debt to reduce that debt from approximately $214 million to $90 million. In exchange, the lenders will receive 100% of the equity of Charlotte Russe, subject to dilution from a new proposed management equity incentive plan.
Under the deal, term loan lenders will reduce the principal to $90 million, reduce the annual interest expense by almost 50% and extend maturity to December 2022, according to a company press release. Current equity interests will either be redeemed and canceled, or transferred to debt holders, in each case for "nominal cash consideration," new equity interests will be issued to the holders of the Term Loan debt, subject to dilution from the new proposed management equity incentive plan, and annual debt service and operational expenses will be substantially reduced.
The deal is subject to several conditions, most notably that the company obtain a threshold amount of annualized operational savings, including rent relief, and the commitment of all holders of the debt to participate in the proposed out-of-court restructuring. The company does not anticipate any impact or interruption to the business as a result of this transaction, which it expects to complete in early 2018, according to the release.
As a mall-based, teen apparel retailer owned by private equity, Charlotte Russe fits the mold of struggling retailers almost perfectly. In 2009, at the time of the $380 million take-private buyout by Advent International, Charlotte Russe operated 500 stores and was already facing stiff competition, particularly from fast-fashion retailers like Forever 21 and H&M. Fitch had listed the company's debt on its "Bonds of Concern" list, and Retail Dive flagged it as a retailer that could go bankrupt this year.
The teen retailer has, however, made some headway with e-commerce. In March, its native mobile app, launched in summer 2016 and featuring a shoppable Instagram feed, hit one million downloads.
While many retailers have turned to private equity for support during a difficult retail environment, their turnaround ambitions have not always aligned with private equity priorities. The financial firms often load up the retailers they own with debt burdens that can make it difficult for them to properly invest in a turnaround, whether it entails beefing up traditional efforts like merchandising or developing new systems to meet the newfangled supply chain demands wrought by e-commerce. Instead, private equity turns to the debt spigot for dividends. And while retail companies with low debt can ride out bad times, highly leveraged ones can swiftly find themselves in danger of faltering badly. Yet their owners, time after time, don't pay the price.
For Charlotte Russe — which runs 545 Charlotte Russe stores throughout 45 states and Puerto Rico, plus 11 Peek Kids stores and an e-commerce site for both brands — cost cuts will now be in focus, but it also needs to work on its merchandising and other priorities.
"We appreciate the very constructive discussions we've had with our owners and lenders ahead of our 2019 term loan expiration, and we are very pleased to be taking this important step, which puts us on a clear path to reducing our long-term debt, improving our financial flexibility, reinvigorating the Charlotte Russe brand and positioning the company for success," CEO Jenny Ming said in a statement.
Moody's Investors Service downgraded the retailer on the announcement.