Revamp may pit Payless lender group against PE firms: update

By Lisa Allen, CapitalStructure

Restructuring at low-priced shoe retailer Payless Inc is getting expedited with first-lien lenders to the company organizing and hiring financial and legal advisors.

The lenders have formed an ad hoc group and hired Houlihan Lokey Inc as financial advisor, said two sources familiar with the situation. One source added that King & Spalding acts as legal advisor to the group, which holds more than 51 percent of the first-lien debt.

The restructuring could potentially pit the lender group against Payless’s private-equity backers Blum Capital and Golden Gate Capital, although in an interesting twist, Golden Gate — which is well-versed in investing in operationally and financially challenged companies — also owns a significant position in Payless’s second-lien debt as well as some first-lien debt, according to one source.

The first-lien TL had a bid at 48 today (Feb. 16), not materially different from recent levels, according to loan market participants.

Meanwhile, the source confirmed that Payless is taking advice from Guggenheim Partners, as previously reported by Bloomberg; and Kirkland & Ellis, as previously reported by Reuters.

The retailer is weighed down by debt (a $520 million 2021 first-lien TL, a $145 million 2022 second-lien TL, and a $300 million 2019 ABL revolver) as it attempts to fend off a highly competitive retail environment and dwindling mall traffic.

S&P downgraded Payless’s corporate credit rating to “CCC” from “B-” on Feb. 1 based on fears that a restructuring is increasingly likely.

“We believe the entity’s existing capital structure is unsustainable given our expectation for persistently negative free operating cash flow and shrinking revolver availability, and that the company will likely pursue options to address its capital structure over the next 12 months,” S&P analyst Andrew Bove said in the report.

S&P estimated a recovery in the low end of the 30 percent to 50 percent range for the first-lien TL lenders and a 0 percent to 10 percent recovery for the second-lien TL lenders in the case of a default.

Payless has about 4,400 stores in 30 countries and LTM revenue around $2.3 billion, according to Moody’s.

Blum Capital and Golden Gate acquired the Topeka, Kan.-based company in 2012 as part of a $2 billion deal for what was then known as Collective Brands Inc. The buyout firms bought what is now Payless, and Wolverine Worldwide purchased the company’s performance and lifestyle group.

Spokeswomen for Guggenheim Partners, Payless and Blum Capital declined to comment. Representatives for Houlihan Lokey, King & Spalding and Kirkland & Ellis did not respond to requests for comment.

– Kerry Kantin at LevFin Insights, a sister publication of CapitalStructure, contributed to this article.

Note: This story was first published by CapitalStructure, a sister publication to Buyouts. For more information about CapitalStructure, contact Shasha Dai at shasha.dai@capital-structure.com.

Update: This story has been updated to clarify the situation between the private equity firms and the lender group.

Photo credit: The exterior of Payless at 437 Fifth Ave in New York City. Photo by Buyouts Staff.