The same week that Sears went bankrupt, credit-rating agencies added David's Bridal Inc. of Conshohocken to the growing list of private-equity-owned retail chains to have defaulted on their debt.
On Oct. 15, David's Bridal, which operates more than 300 stores that sell gowns and accessories by Vera Wang and other designers, missed a payment on $270 million in unsecured notes yielding 7.75 percent and entered a 30-day "grace period" to try to reduce payments owed its lenders, S&P Global Ratings said in a brief report, adding, "A broader debt restructuring is likely."
Customers shouldn't worry, the company said in a statement. David's said that it has cash to run the business and that it stiffed its creditors on purpose, as a "strategic decision" while it negotiates to reduce its debt load "so we can increase our financial flexibility and further invest in our business." The company called the talks since Monday "constructive."
Bridal shops have faced challenges, including a steady decline in the proportion of Americans getting married, brides' and bridesmaids' increased access to cheap internet imports, and ownership by investment firms determined to squeeze out more profits.
S&P cut its rating on the David's notes to D from a previous C, and has lowered David's corporate credit rating to SD ("Selective Default") from a previous junk-level rating of CCC. S&P warns investors there is "negligible recovery" likely, with less than 10 percent of outstanding principal and interest likely to return to shareholders. A reorganization would not necessarily affect store operations.
In a separate report, Moody's Investor Service said David's and Sears are both less likely to pay their creditors because they are owned by private-equity investment firms, whose "aggressive financial policies," heavy borrowing, and focus on taking money out of firms tend to result in a lower likelihood that retailers they own will pay their debts. Some 92 percent of companies owned by 16 large private equity firms are rated at junk-bond levels, compared to 40 percent of operator-owned or corporate-owned stores, Moody's added.
"A lot of retailers that have gone belly-up are private-equity-owned. It's pretty constant," said Ted Gavin, a partner in Gavin/Solmonese, a turnaround firm based in New York and Wilmington which is currently advising Videology creditors and the Montgomery Ward estate. "They make incestuous loans to these companies at high rates, and they charge excessive fees. Cumbersome debt burdens, and owners taking fees simply for being an owner, does nothing good, and can precipitate distress." Suppliers owed money by troubled store chains sometimes band together to bail them out, but otherwise "this doesn't end well," sometimes ending in bankruptcy and other private equity owners, or liquidation.
David's owner is the New York buyout firm Clayton, Dubilier & Rice, which bought control of the chain in 2012 in a deal that valued the firm at $1.05 billion. The seller was Leonard Green & Partners, Los Angeles, which remained a minority owner. The company plus the separate Priscilla of Boston chain were together valued at $750 million when Leonard Green bought them from Macy's in 2006. Macy's had paid $401.5 million to take David's private in 2001. Cofounder Steve Erlbaum sold shares worth $94 million as part of David's initial public share offering in 1999.
Then-chief executive Robert D. Huth explained the 2012 sale by noting fewer American women were having weddings since the 2008 recession, and more of those who married were buying dresses online, including from cheap import houses. David's employed 12,000 in the United States and Canada, including around 750 at its Conshohocken offices and Bristol warehouse. Huth left David's in 2013.