Party City buys time with debt deal

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Diving brief:

  • Party City has an agreement that raise $450 million in debt from its balance sheet and raise $100 million in new capital, the struggling party supplies retailer said in a press release late last week..
  • The deal was reached with owners representing 52% of Party City’s senior tickets due in 2023 and 2026.
  • Under the agreement, noteholders would exchange the notes for shares and new senior notes due 2026 which pay a higher interest rate (10%) as well as floating rate notes due 2025 ..

Overview of the dive:

Party City CEO Brad Weston said his company’s deal with the lender group “demonstrates the confidence of some of our bondholders in our strategy and our management team, and we appreciate their support for our long-term success.”

It comes at a time of uncertainty for the retailer, after temporarily closed its stores in response to the coronavirus pandemic, after a year of pulverized sales which amplified the risks on its balance sheet.

Party City last year took a hit from a whole world helium shortage, which dragged its sales over profits. He then underwent a horrible season at its Halloween City stores, where sales fell more than 20% during the month of October, pointing to competition concerns in the costume category.

Retail trade in the fourth quarter sales fell more than 12% as Party City’s losses soared. It then ran into a pandemic that forced a temporary end to mass gatherings, including graduations and birthday parties (despite drive-in parties). All of this has added stress to Party City’s debt burden, the long-term portion of which is about $1.5 billion – a legacy of his private equity acquisition in 2012.

At the end of March, S&P Global slapped an unwanted level CCC+ note on Party City, citing “significant headwinds from the expanding coronavirus pandemic and weaker economic outlook.” The ratings firm also issued a negative outlook for the company, based on “substantial risks to Party City’s operating performance” given the company’s weakness in the second half of 2019 as well as risks related to the execution of turnarounds and “the expected substantial decline in its demand due to the coronavirus outbreak,” analysts said.

In short, the retailer faced an increased risk of bankruptcy. The debt deal, which is expected to be completed in June, gives the company breathing room in terms of timing as it tries to get back on track. Part City’s turnaround plan relies heavily on improving the in-store experience, strengthening balloon sales, tackling “price value perception”, moving towards in-store customer engagement and leveraging its omnichannel capabilities.

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