Men's Wearhouse, LLC (The) -- Moody's changes Men's Wearhouse's outlook to negative; assigns B3 to add-on priority term loan

Moody's

April 9, 2021 at 6:21 PM·17 min read

Rating Action: Moody's changes Men's Wearhouse's outlook to negative; assigns B3 to add-on priority term loanGlobal Credit Research - 09 Apr 2021New York, April 09, 2021 -- Moody's Investors Service (Moody's) today assigned a B3 rating to The Men's Wearhouse, LLC's (Men's Wearhouse) $25 million add on senior secured priority term loan due 2025 and changed the company's outlook to negative from stable. At the same time, Moody's affirmed the company's existing ratings, including the Caa1 corporate family rating (CFR), Caa1-PD probability of default rating (PDR), B3 rating on the $75 million senior secured priority term loan due 2025, and Caa1 rating on the $365 million takeback senior secured term loan due 2025.Net proceeds from the $25 million add-on senior secured priority term loan along with $50 million of new junior lien convertible notes due 2024 (not rated by Moody's) were used to repay $30 million of outstanding borrowings under the company's asset-based revolving credit facility due 2024 ("ABL" not rated by Moody's), with remaining proceeds placed in a restricted cash account held by New TMW MidCo LLC, which may be withdrawn and contributed to Men's Wearhouse, LLC so long as pro forma liquidity is less than $87.5 million (the threshold under the takeback and add-on priority term loan facility to exercise the PIK interest option), with any remaining proceeds to be released on December 2, 2021. As part of the transaction, New TMW TopCo , Inc. and New TMW MidCo LLC were added as Guarantors.While the added liquidity is credit positive for Men's Wearhouse, the transaction highlights the ongoing risks and uncertainties around the pace of recovery from the coronavirus pandemic, including easing of restrictions and the recovery in consumer demand. Thus the outlook change to negative reflects the risk that continued weak demand for men's tailored clothing and rentals will further impact the company's ability to drive a recovery in operating performance, cash flow and liquidity. The company has yet to demonstrate that it can consistently generate positive free cash flow and reduce its currently high outstanding revolver borrowings. Moody's regards the coronavirus outbreak as a key social risk under its ESG framework given the substantial implications for public health and safety.Assignments:..Issuer: Men's Wearhouse, LLC (The)....Priority Senior Secured Bank Credit Facility (Local Currency), Assigned B3 (LGD3)Outlook Actions:..Issuer: Men's Wearhouse, LLC (The)....Outlook, Changed To Negative From StableAffirmations:..Issuer: Men's Wearhouse, LLC (The).... Probability of Default Rating, Affirmed Caa1-PD.... Corporate Family Rating, Affirmed Caa1....Priority Senior Secured Bank Credit Facility (Local Currency), Affirmed B3 (LGD3)....Senior Secured Bank Credit Facility (Local Currency), Affirmed Caa1 (LGD4)RATINGS RATIONALEMen's Wearhouse's Caa1 CFR reflects its current weak operating performance and credit metrics stemming from significant pandemic-related declines in revenue and earnings. Although the company materially improved its capital structure upon exit from its chapter 11 bankruptcy, financial leverage remains very high and interest coverage weak due to depressed sales and negative earnings. While Moody's expects sequential improvement, sales and earnings will remain below 2019 levels for the next several years as the company contends with pandemic-related changes in consumer behavior. Moody's expects sequential improvement to stem from improved sales trends and cost savings and efficiency initiatives, partly offset by margin pressures which include mix shift toward lower margin casual clothing and online sales, and continued investment in growth initiatives such as e-commerce and digital marketing. The rating also reflects governance considerations, including the company's recent bankruptcy emergence and ownership by former debtholders prior to bankruptcy.The rating is supported by Moody's expectation for adequate liquidity over the next twelve months, which was recently boosted by an additional $75 million of debt capital into the company. Moody's also expects free cash flow to turn positive during 2021 due to working capital improvement, with reductions in borrowings under its ABL facility. Liquidity also benefits from the lack of near-term maturities, and the extension of the ABL and term loan financial maintenance covenant holidays until July 2022 and January 2023, respectively; although significant operating improvement will be needed to meet those covenant requirements. The rating also reflects Men's Wearhouse's meaningful scale in the men's clothing market, offering a similar product mix and brand diversity, with each brand focusing on different customer demographics. While the company operates in a relatively narrow segment of the apparel industry, primarily selling and renting men's tailored and polished casual clothing for business and special occasions, Moody's views this category as generally having less fashion risk than most segments of apparel retailing. Nevertheless, the shift towards more casual clothing and increased penetration of online shopping have been a persistent challenge, and these trends have accelerated due to the pandemic.Former parent company, Tailored Brands, Inc., and certain subsidiaries filed for Chapter 11 bankruptcy on August 2, 2020. On December 1, 2020, Tailored Brands, Inc. completed its financial restructuring and emerged, with debt having been reduced by around $680 million (not including the new $25 million priority and $50 million convertible incremental debt), or nearly 50%, to less than $750 million. The Men's Wearhouse LLC, an intermediate holding company, is the borrower under the rated facilities. The B3 ratings on the $75 million priority senior secured term loan due 2025 and $25 million priority senior secured term loan add-on due 2025 reflect their priority first lien on all assets of the borrower, except short term assets such as inventory and receivables on which it has a second lien behind the unrated $430 million ABL revolver. The Caa1 rating on the $365 million senior secured term loan due 2025 reflects its second priority position behind the $75 million priority senior secured term loan and sizeable ABL revolver. These rated facilities also benefit from the fairly sizeable level of more junior claims in the capital structure, including the unrated $50 million junior lien 6% pay-in-kind (PIK) convertible notes due 2024, and unsecured claims such as leases and accounts payable.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be downgraded if liquidity deteriorates, such as weaker free cash flow and an inability to reduce revolver debt, if revenue and earnings trends do not sequentially improve, or if its probability of default otherwise increases for any reason.The ratings could be upgraded if operating performance sustainably improves such that debt/EBITDA is expected to remain below 6.0 times and EBIT/Interest sustained above 1.0 time, while maintaining an adequate overall liquidity profile.The Men's Wearhouse, LLC is an omni-channel specialty retailer of menswear, including suits, formalwear and a broad selection of business casual offerings. The company operates over 1,000 stores in the U.S. and Canada under the Men's Wearhouse, Jos. A. Bank, Moore's Clothing for Men and K&G brands. Revenues for the twelve month period ended October 31, 2020 were less than $1.5 billion. The company is owned by former debt holders prior to its bankruptcy filing, with no one owner having majority control.The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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