New Era Cap, LLC has proposed a $300 million senior secured first-lien term loan due 2028 to support a recapitalization.

The debt offering was revealed in a debt grade issuance from Moody’s Investors Service.

Moody’s said proceeds from the proposed term loan along with borrowings under a new unrated $150 million asset-based revolving credit facility due 2026 (ABL) will be used to repay borrowings under New Era’s existing bank credit facilities, fund a dividend to shareholders, and pay related fees and expenses

Moody’s said the pro forma capital structure also considers the conversion of New Era’s existing unsecured subordinated promissory note into non-redeemable preferred equity as part of a planned reorganization of the company that is set to close around the time of the recapitalization transaction. At that time, New Era Cap, LLC will be formed and replace New Era Cap Co., Inc. in the organizational structure. The ratings are subject to the completion of the transactions as proposed and review of final documentation.

The rating agency said New Era remains majority-owned by the fourth-generation owner and CEO, Chris Koch. Private equity firm ACON Investments invested convertible debt into New Era and upon the planned reorganization, the debt will convert to equity and it will become a minority investor.

Moody’s assigned first-time ratings to New Era Cap, including a B1 corporate family rating (“CFR”) and a B1-PD probability of default rating (“PDR”). In addition, Moody’s assigned a B2 rating to New Era’s proposed $300 million senior secured first-lien term loan due 2028. The outlook is stable.

“The B1 CFR reflects governance considerations, particularly New Era’s conservative pro forma leverage and majority ownership by its CEO, a fourth-generation family member,” stated Mike Zuccaro, Moody’s vice president. “The stable outlook reflects our expectation for continued moderate revenue and earnings growth while maintaining a conservative financial policy, including Moody’s-adjusted debt-to-EBITDA remaining below 3 times and interest coverage above 4 times over the next 12-to-18 months.”

Ratings Rationale
Moody’s wrote, “New Era’s B1 CFR reflects governance considerations, particularly its conservative pro forma leverage profile, with Moody’s adjusted debt-to-EBITDA of less than 2 times for the twelve-month period ended September 2021, and majority ownership by its CEO, a fourth-generation family member. New Era also benefits from its well-established position in the licensed headwear market with over 100 years of business history, good brand awareness and long-standing relationships with key sports licensors with longer-term expirations of key contracts. The rating is constrained by its small revenue scale and limited product diversity, as well as the need to demonstrate that recent accelerated revenue growth, margin improvement and free cash flow generation are sustainable over the longer term. While the company has a solid market position in global licensed headwear, its niche product focus in this category makes it more susceptible to potential changes in consumer preferences. The rating further reflects high customer and licensor concentrations, which increases the risk related to larger customer financial performance or its partner merchandising strategies.

“New Era has very good liquidity, supported by Moody’s expectation that balance sheet cash, positive free cash flow and ample excess revolver availability will more than support cash flow needs over the next 12-18 months. The company will have access to a proposed $150 million ABL due 2026 that is expected to have $50 million drawn at close as part of the Recapitalization Transaction. The ABL is expected to be used to cover seasonal working capital swings and contains a minimum fixed charge coverage ratio of 1.0x that is tested when the excess revolver availability is less than the greater of (i) 10 percent of the maximum revolver amount or (ii) $15 million. The company is expected to remain in compliance with the covenant. The proposed term loan will not contain financial maintenance covenants.

“The B2 rating assigned to the proposed senior secured term loan reflects its priority first lien on substantially all assets of the borrower, except short term assets such as inventory and receivables, on which it has a second lien behind the $150 million ABL revolver, and assets securing mortgages and aircraft debt. The term loan is guaranteed by its wholly-owned domestic subsidiaries. The pro forma capital structure also contemplates the conversion of its existing unsecured subordinated promissory note into preferred equity as described earlier.

“As proposed, the secured term loan is expected to provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following:

  • “Incremental debt capacity up to the sum of (A) the greater of (1) a base level of EBITDA as defined in the agreement (increasing on the Adjusted Basket Date to the Increased EBITDA Amount) and (2) 65 percent of Consolidated Adjusted EBITDA for the Test Period most recently ended on or prior to such date (increasing on the Adjusted Basket Date to 100 percent of Consolidated Adjusted EBITDA for the Test Period most recently ended on or prior to such date), plus unlimited amounts subject to the Specified Permitted Indebtedness Ratio Requirement of 1.5x for pari passu secured debt. Amounts up to (a) the greater of (i) $52,500,000 (increasing on the Adjusted Basket Date to 35 percent of the Increased EBITDA Amount) and (ii) 35 percent of Consolidated Adjusted EBITDA minus incremental debt not subject to the terms of the credit agreement, may be incurred with an earlier maturity date than the initial term loans.
  • There are no express “blocker” provisions that prohibit the transfer of specified assets to unrestricted subsidiaries such transfers are permitted subject to carve-out capacity and other conditions.
  • Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, with no explicit protective provisions limiting such guarantee releases.
  • There are no express protective provisions prohibiting an up-tiering transaction

“The above are proposed terms and the final terms of the credit agreement may be materially different.”

Photo courtesy New Era