Moody’s Investors Service downgraded Everest Holdings LLC, the holding company of Eddie Bauer, due to revenue and operating earnings declines amid a highly promotional selling climate.

Everest Holdings’ Corporate Family Rating (CFR) was reduced to Caa2 from B3 and Probability of Default Rating (PDR) to Caa1-PD from B3-PD. Moody’s also downgraded the company’s $225 million senior secured term loan due 2020 to Caa2 from Caa1. The rating outlook remains stable.

“The downgrade indicates that even with an optimistic view on an improvement in operating results, Moody’s expects Eddie Bauer’s credit metrics and liquidity will remain very weak and materially worse than that of B3 rating over the next 12-18 months,” said Moody’s Analyst Dan Altieri.

Over the LTM period ended April 1, 2017 Eddie Bauer has seen revenue declines and lower gross margins as a result of markdown activity in response to a highly promotional retail environment. EBITDA over the period deteriorated meaningfully, resulting in a tight liquidity profile and interest coverage (EBIT/Interest Expense) well below one time, according to the ratings agency. Moody’s estimates lease adjusted leverage in the mid-9 times range, however leverage for funded debt is significantly higher.

The two-notch downgrade of the CFR to Caa2 indicates Moody’s view that this level of liquidity and credit metrics is unsustainable and that Eddie Bauer’s earnings growth in 2017 will not be enough to meaningfully improve its credit profile. It also reflects Moody’s expectation that the family recovery rate in an event of default would be below the standard 50 percent and the application of Moody’s Loss Given Default Methodology.

Moody’s took the following rating actions:

  • Issuer: Everest Holdings LLC
  • Corporate Family Rating, downgraded to Caa2 from B3
  • Probability of Default Rating, downgraded to Caa1-PD from B3-PD
  • $225 Million Senior Secured First Lien Term Loan due 2020, downgraded to Caa2 (LGD5) from Caa1 (LGD4)
  • Outlook, remains Stable

Ratings rationale
Eddie Bauer’s Caa2 CFR reflects the company’s weak credit metrics and liquidity profile resulting from a sizable debt-financed distribution to shareholders in 2014, combined with significantly worse than anticipated operating performance. The rating also reflects the company’s volatile operating performance, fashion risk associated with the business, and financial policy risk resulting from Eddie Bauer’s financial sponsor ownership. The rating is supported by the company’s well recognized brand name. Although it has struggled with its identity in the past, beginning 2012 the company has focused on apparel geared towards the active, outdoor lifestyle which continues to be popular with consumers. However, competition is stronger now than it was in the past as a result of numerous companies focusing on the space.

The Caa2 rating on Eddie Bauer’s $225 million senior secured term loan is in line with the company’s CFR and reflects its junior position in the capital structure relative to the ABL facility. The term loan is secured by a first priority lien on essentially all assets of domestic subsidiaries (excluding accounts receivable and inventory on which it has a second priority lien behind the ABL) as well as a 2/3 pledge of foreign subsidiary stock. The term loan’s collateral position creates effective priority relative to the company’s unsecured obligations including trade payables and lease rejection claims.

The stable outlook reflects the lack of near-dated maturities in Eddie Bauer’s capital structure and the expectation that the company has sufficient liquidity to support Moody’s projected cash burn over the next 12-18 months.

A ratings upgrade would require a reversal of recent operating trends including consistent top line and comp store sales, as well as meaningfully higher EBITDA. An upgrade would require an improved liquidity profile, including positive free cash flow generation and EBIT/Interest expense above 1 times.

Ratings could be downgraded if Eddie Bauer fails to meaningfully improve operating performance further stressing the company’s liquidity profile. Ratings could also be downgraded if it becomes less likely that the company will be able to refinance or extend the maturity on its ABL facility at least a year before it comes due in June of 2019, or if an event of default (such as a distressed exchange) becomes more likely.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Rating Methodologies page on moodys.com for a copy of this methodology.

Everest Holdings LLC, headquartered in Bellevue, WA, is a holding company with operations under the Eddie Bauer brand name. Eddie Bauer operates 325 stores in the US, Canada, and Germany (as well as a joint venture in Japan) and generated last-12-months revenue of approximately $745 million through April 1, 2017. It also manages a direct business and domestic and international licensing partnerships. Eddie Bauer is owned by Golden Gate Capital.

Photo courtesy Eddie Bauer