The cost to buy debt protection on bonds backing Staples gapped higher today, after Thomson Reuters reported that private equity firm Sycamore Partners was in advanced negotiations to acquire the troubled office-supplies retailer, pending the finalization of a debt-financing package.
Five-year CDS referencing Staples’ slim stack of bonds lurched up by 35 bps, or roughly 13%, in the biggest move higher today among CDS IG 28 constituent names. The latest indications, at 305 bps, are 60 bps wider since the start of June, and more than 100 bps wider since the company in early April revealed plans to explore a sale to private-equity interests.
Sycamore’s bid, which could be announced north of $6 billion as early as next week, apparently trumped one floated by Cerberus Capital Management, according to the report. For reference, Staples’ total enterprise value of just over $5.4 billion as of April 29 includes a net cash position, on $1.05 billion of total debt and nearly $1.3 billion of cash and short-term investments, according to S&P Global Market Intelligence.
Staples’ debt exposure is almost entirely from its two long-term debt issues, including the $500 million each of its 2.75% notes due Jan. 12, 2018 and 4.375% notes due Jan. 12, 2023, both of which date to issuance in January 2013. The company repaid its $2.5 billion B term loan last spring after regulators blocked its proposed $6.3 billion merger with Office Depot. The 4.375% 2023 issue traded this morning at roughly 102.25, according to MarketAxess.
Notably, both bond issues are subject to change-of-control puts at 101, should an M&A event force ratings below the investment-grade threshold by S&P Global Ratings and Moody’s.
At present, Staples is rated BBB–/Baa2, including a negative outlook at S&P Global Ratings and a stable outlook at Moody’s. Fitch rates the company below the IG line at BB+, with a stable outlook, following a downgrade in April 2016 predicated on the secular headwinds that prompted the ill-fated merger ambitions of Staples and its most direct retail analogue.
Operational struggles have been plain since the financial crisis, and were punctuated in March 2014, when the retailer chilled the credit markets with weaker-than-expected fourth-quarter sales, and attendant plans to shutter 225 stores in North America. From peak operating cash flow of more than $2 billion in 2009, Staples’ LTM operating cash flow slid to $1.6 billion in fiscal 2012, $1.2 billion in fiscal 2013, less than $1 billion in fiscal 2016, and $916 million over the latest LTM period to April 29, according to S&P Global Market Intelligence.
Its five-year CDS was indicated at roughly 250 bps both immediately after the regulatory blockade of the Office Depot merger and after the 2014 sales warning. This morning’s CDS reading is also roughly double the interim lows recorded in the summer of 2015, trade data show. — John Atkins
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