Sycamore Partners, the equity group that bought Pure Fishing in 2019, has repurchased the company’s entire $255 million second-lien term loan, reports financial information.
Analytics firm S&P Global Ratings, which describes the move as ‘tantamount to a default.’
S&P also warns that, despite this move to reduce Pure Fishing’s debt burden, the company’s capital structure is ‘unsustainable’ with ‘no room for operating missteps.’ There could be a conventional default within the next 12 months, it adds.
According to S&P, Sycamore has also repurchased about a quarter of Pure Fishing’s first-lien term loan at a deep discount over the past few months. First-lien loans are loans that have to be repaid first from the available assets of a company in the event of default or bankruptcy, with second-lien loans given lower priority.
The decision for a parent company, such as Sycamore Partners, to acquire loans of its subsidiary can be motivated by several factors. Acquiring these loans can provide the parent company with greater control over its subsidiary’s financial health and operations. Furthermore, purchasing these loans at a discount, as Sycamore has done with Pure Fishing’s first-lien term loan, can be a strategic move to reduce the overall debt burden of the subsidiary. Acquiring the debt at a lower cost can enhance the subsidiary’s financial position and reduce interest expenses, potentially improving its financial outlook.
But, says S&P: “We consider the second-lien transaction to be a distressed exchange and tantamount to a default because of Pure Fishing’s ongoing cash burn and need for liquidity this year.
“For the same reasons, we also view the open market transactions as tantamount to a default and Sycamore’s repurchase of a significant portion at a deep discount to par as constituting a debt restructuring.
“Pure Fishing continues to struggle because of the retail customer de-stocking that has affected the entire industry this year and we expect very weak credit metrics through 2024,” says S&P.
“We continue to believe the company’s capital structure is unsustainable due to our expectations for high leverage through 2024, with no room for operating missteps or unexpected headwinds.
“We expect Pure Fishing’s cash flow will be insufficient to cover its fixed charges, which increases the possibility of another restructuring or a conventional default in the next 12 months.”
Pure Fishing’s consolidated financial statement for the years ending December 31st, 2022 and 2021, reports that as of December 31st, 2022, the annual maturities of long-term debt over the next five years and thereafter are: 2023, $36,909m; 2024, $69,324m; 2025, $709,900m; and 2026, $415,991m; a total of $1,232,124b.
The statement adds that Pure Fishing experienced a decline in customer demand in 2022 compared to 2021 and 2020.
Additionally, the company built up its inventory balances throughout 2022 and late 2021 in anticipation of strong sales and also to address supply chain issues experienced in 2021, resulting in higher operating and interest costs and negative cash flows.