(Debtwire) Takko focuses on keeping leverage low following debt reduction plan as Apax retains minority stake

12 April 2023 | 10:45 GMT

Takko has had a long history in leveraged finance markets with volatile earnings and concerns over high adjusted leverage if classing letter of credit facilities as extra debt. But the German-headquartered retailer's new capital structure plans will enable significant debt reduction and sensitized business plan targets suggest net leverage will remain low. Previous owner Apax Partners will still hold a small minority stake as bondholders take a combined majority ownership stake and look to refinance extended 2026 maturities down the line, according to two sources familiar and two buysiders.

The company yesterday (11 April) announced it has entered into an agreement with funds advised by private equity firm Apax Partners, its bondholders and bank lenders to secure a new capital structure that will materially reduce net leverage by more than EUR 250m and extend debt maturities until 2026, as reported.

Takko previously faced EUR 280m of May 2023 debt maturities, including an EUR 80m super senior TLB borrowing base, a EUR 185m letter of credit and a EUR 15m ancillary facility. It then faced EUR 510m of senior secured fixed and FRN maturities in November 2023.

The latest proposed transaction will mean bondholders become majority shareholders with existing sponsor Apax Partners maintaining a small minority stake below 10%, given it provided half of a EUR 40m COVID facility (with a remaining portion provided by fund AlbaCore Capital Group) and there is also an equity ticking fee, according to the two sources familiar. 

Fund Silver Point Capital will become a majority shareholder given its large bondholding according to the first source, as over 90% of Takko outstanding bonds were previously held by AlbaCore Capital Group, Napier Park and Silver Point Capital, as reported.

Apax Partners will be left as a minority shareholder after owning the business since 2011 and acquiring Takko at an enterprise value of around EUR 1.4bn.

“Apax will still hold a small minority stake,” the first source familiar said. “The percentage is not disclosed as the deal has not closed yet. In these transactions, it is usual to have a nuisance fee but Apax had the small holding of half of the COVID facility which was converted to equity.”

The first source familiar noted that some of the bondholders bought the bonds previously as performance had been resilient and even now there is still not so much operational weakness going through the restructuring. The source added that despite primary markets being relatively closed with a refinancing currently not possible, the business has room to grow further and Takko has the footprint across Germany while people understand their proposition.

One buysider also follows the name but noted the large bondholder group were driving decision-making.

Takko’s capital structure revamp transaction will reduce its outstanding debt and provide lower net leverage for the company. Debt maturities have been extended to 2026, its EUR 80m B facility will be reinstated as a term loan in its full amount with a margin uplift, while the EUR 510m senior secured noteholders and the EUR 40m COVID facility providers will partially reinstate their debt as both EUR 300m reinstated OpCo debt that will rank as senior secured notes and also as EUR 100m reinstated HoldCo debt ranking junior to this. Over EUR 150m of the senior secured notes and COVID facility will be equitized with existing shareholders retaining a minority position in the post transaction equity.

The EUR 300m reinstated OpCo debt will have a 3.75% cash-pay coupon and 8.75% PIK interest with a full 12.5% pay-if-you-can feature subject to a minimum liquidity test until May 2024 and then 3.75% compulsory cash interest with pay-if-you-can on the 8.75% PIK portion. The EUR 100m reinstated HoldCo debt will pay a 15% PIK coupon.

Takko would be 3.2x net levered pro forma the proposed transaction versus 4.3x ahead of it (see Debtwire analyst capital structure below).

Takko chance

The company aims to focus on earnings growth and keep net leverage low before looking to refinance its debt ahead of their extended 2026 maturities according to the source familiar. Takko’s business strategy is focused on improving pre-IFRS 16 adjusted EBITDA to EUR 185m at FY27/28 versus EUR 112m at FY22/23 with EBITDA margins climbing to 10.5% from 9.2% over the same period. Growth can be driven by international expansion in core European markets as well as improving existing sales through its brand campaign and boosting its online offering.

Takko is targeting international expansion in geographies such as Italy and France for example as well as other European nations apart from its home turf in Germany.

The company will still be led by CEO Tjeerd Jegen who was formally in charge at Dutch retailer Hema. Jegen was CEO of Hema and worked for the firm from April 2015 to June 2021. Though the company completed a recapitalization process in 2020, as reported, he grew the online business, expanded the business internationally and refinanced the capital structure in 2017.

The first source familiar noted that management have given their outlook based on new store opening outside Germany while Tjeerd Jegen has a good record. The source added that Takko have given details on why they selected these countries to expand into and even without a rise in sales there is growth room for EBITDA to reach a level to make the capital structure refinanceable before 2026. The source noted that Takko may not get to the EUR 185m EBITDA but they can be below a 2.5x-3.0x net leverage range and then equity owners will have an upside.

Takko can maintain low net leverage even under the company's less ambitious sensitized business plan which targets a pre-IFRS 16 adjusted EBITDA of EUR 105m for FY23/24 and EUR 159m at FY27/28. The company has the potential to keep net leverage low though constraining any cash burn before earnings growth can drive further deleveraging. The company in FY23/24 has guided for a EUR 105m pre-IFRS 16 adjusted EBITDA and under its sensitized assumptions could face around EUR 53m capex given the upper-end of capex as 3.5%-4.0% of sales expectations, EUR 12m cash taxes given 0.9% of net sales guidance and a possible rough-estimate of around EUR 30m of cash-pay interest pro forma its recapitalization, though PIK interest will accrue, leaving EUR 11m of annual free cashflow ahead of extraordinary items and working capital swings.

Takko will have reasonable liquidity with EUR 70m cash pro forma the transaction and access to its EUR 175m letter of credit facility and EUR 13m ancillary facility. Letters of credit had been utilized for EUR 140m as of 26 March 2023. Being cautious and classing these total facility amounts as extra debt would mean adjusted leverage metrics would climb towards 4.6x.

“The growth targets are fine. Letters of credit are the same story and every retailer has this problem. Supplier risk doesn’t always crystalise as a letter of credit but at least its manageable this way. One can adjust metrics for letter of credit but then one should adjust leverage for all retailers, but that wouldn’t achieve much,” independent special situations firm Sarria said. “That said, you can’t entirely ignore it, as usually that risk is compensated out of gross margin and not interest.”

“Even through the current restructuring, the letters of credit have not been accounted for as leverage through the process. We don’t include as leverage and they were not part of the payment waterfall,” the first source familiar said. “They are guarantees more than extra leverage.”

The first source familiar added that the new capital structure has a pay-if-you-can element too which makes sense as it helps liquidity and the company can pay in cash or PIK but it means the bonds can trade better in secondary. It is not common but gives stability rather than a pure PIK instrument, the source noted.

Takko also disclosed that it received a government subsidy of EUR 24m in March which took total proceeds from the German government support to the maximum EUR 30m permitted.

“Current trading is fine, the business plan is still there and management will focus on inventory management. They are also trying to change the perception of the brand. They have launched PR initiatives to change perception and this will help,” the first source familiar noted. “They also hope shoppers may join them from competitors such as H&M.”

Takko was advised by PJT Partners as Financial Advisor and Gleiss Lutz and Simpson Thacher & Bartlett LLP as Legal Advisor, according to the company press release. TLB borrowing base lenders were working with Moelis and Clifford Chance and bondholders with Houlihan Lokey and Freshfields, as reported.

The transaction is subject to certain closing conditions and customary regulatory approvals.

Fortunes could have been different for stakeholders. Takko pre-marketed a high yield refi attempt through Deutsche Bank back in November 2021 but did not follow up with a formal roadshow given a pricing mismatch, as reported.

Takko, PJT Partners, Apax Partners, AlbaCore Capital Group, Napier Park and Silver Point Capital declined to comment.

by Adam Samoon with capital structure by Priyanka Kotadia