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Sun 21st Feb 2016 - Moody’s places Soho House bonds on review as company seeks increased debt deal in return for £20m equity injection
Moody’s places Soho House bonds on review as company seeks increased debt deal in return for £20m equity injection: Ratings agency Moody’s has placed Soho House bonds on review for downgrade after the company moved to increase its revolving credit facility initially by £5m to £30 million and eventually to £35 million in exchange for an equity injection of £20m. The review reflects the company’s narrowed liquidity profile ahead of its April 2016 interest payment on its senior secured notes due 2018 and uncertainty about the impact of the credit facility move. The agency stated: “Soho House’s business is strongly cash-flowing on the operating level. However, the firm is also in a growth mode, thus consuming more cash than its operations generate. As a result, Soho House’s liquidity is the weakest feature of its credit profile, currently, with only £2.5 million available on the revolver and £8.5 million of cash on balance sheet. The proposed (bond change) would provide Soho House with much needed liquidity via an increase in the revolving credit facility (RCF) and equity contributions, while marginally increasing the company’s leverage. Assuming the proposed series of transactions are executed as outlined in the consent solicitation statement, the company would receive the required liquidity for the next 12 months. However, uncertainty remains over the timing and assurance of equity contributions. Should they not materialize, the company could encounter liquidity challenges and the ratings would likely be lowered. The consent solicitation launched on 5 February 2016 asks the bondholders of Soho House’s 9.125% notes due 2018 to permit the company to increase its £25 million revolving credit facility (RCF). As of 12 February 2015, the company received the bondholders consent, and the first step of the transaction would involve a £5 million increase in the RCF amount. We would expect Soho House to utilize the additional funds quickly as they are slated for the company’s ongoing growth efforts. At present, its existing £25 million RCF has approximately £22.5 million of drawings outstanding. The ability to incur additional debt would slightly raise the company’s leverage (projected to be approximately 7.5x for 2015 including Moody’s standard adjustments) by less than 0.1x and marginally lower its coverage, which is already below 1.0x on an Ebita/interest basis (by approximately 0.1x, assuming the revolver is drawn). As a second step of the transaction, Soho House anticipates receiving an equity infusion of £10 million from its existing shareholders within 90 days of the expiration of the consent solicitation. If the equity is not received within this time frame, the interest rate on the notes will increase by 1% until the equity injection is made. Should the interest expense increase, the interest coverage ratio would decline by approximately 0.1x. We assume that any equity injection would be utilized to pay down the RCF and subsequently re-drawn to fund the company’s ambitious expansion plans. Soho House plans to open approximately six new Houses and up to 30 new owned and joint venture restaurants in the next two years. Therefore, we would not anticipate the leverage profile of Soho House to improve following the equity contribution. As a third and final step of this transaction, Soho House expects to receive another equity infusion of £10 million from its existing shareholders within 180 days of the first equity contribution. Upon this equity injection, the RCF would increase by another £5 million to a total amount of £35 million. Similar to the treatment of the first equity contribution, we would expect the company to apply the proceeds to paying down outstanding amounts under the RCF and subsequently re-drawing them to continue funding the capex program. As a result, upon re-drawing the revolving credit facility, Soho House’s leverage (projected to be approximately 7.5x for 2015 including Moody’s standard adjustments) would increase marginally by less than 0.2x.” In 2014, Soho House realised total revenues of £202.8 million and Ebitda of 43.7 million.


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