S&P downgrades Saks; calls latest financing deal ‘tantamount to a default’
S&P Global Ratings doesn’t think too highly of Saks Global Enterprises’ latest move to enhance its liquidity.
The ratings agency has downgraded the luxury retailer’s credit rating to “CC,” a significant drop from “CCC-plus,” with a negative outlook. In June, Saks said it has secured $600 million in financing from its existing bondholders, which included a debt exchange and the re-tiering of its outstanding senior secured notes.
“The downgrade reflects our view that the proposed financing transaction is tantamount to a default,” S&P said in its analysis. “We will lower our issuer credit rating and issue-level ratings on Saks Global to ‘SD’ or ‘D’ if it completes the proposed transaction, which includes the re-tiering of its capital structure and a below-par exchange of its senior secured notes."
The Saks financing transaction includes a $400 million first-in, last out (FILO) asset-based credit facility and additional commitments of $200 million subject to certain conditions. In addition, $100 million of the new FILO facility will comprise an exchange of its senior secured notes.
"The noteholders will receive less value than they were initially promised and will rank lower in terms of priority than the new money notes following the completion of the transaction,” S&P said.
In its report, S&P noted that a disruption in Saks’ inventory flow has led to a "pronounced deterioration" in its operating performance and liquidity challenges. Overdue payments, borrowing base constraints, and seasonal inventory building led to a decline in the availability under the company’s $1.8 billion asset-based lending (ABL) facility to $415 million as of Feb. 1, 2025.
In addition, Saks reported a free operating cash flow (FOCF) deficit of $517 million in 2024.
“We believe the company’s market position will weaken as competitors with greater financial capacity expand their business operations, S&P stated. “Management has focused on negotiating longer terms with its main vendors and addressing overdue payments to improve its working capital management. “
S&P forecasts the company will report negative FOCF over the next two years and continue to heavily rely on its ABL facility. While Saks has real estate assets worth over $4 billion on a net basis, it has been unable to monetize them in a timely manner to meet its financial commitments, according to S&P.
“We could raise our rating on Saks Global, likely to the 'CCC' category, if it does not consummate the proposed transaction. Under this scenario, our rating would reflect the potential for other restructuring initiatives to address its constrained liquidity.”
When credit ratings are moved into default because of debt exchange, they often bounce back quickly, reported WWD.
