Fading light

Do you smell that?

Is that the warm, welcoming scent of Yankee Candle’s sweet strawberry? The delicate cool of blue hydrangea? Perhaps beach wood? No, that unfortunate odor is “America’s best-loved candle” canceling its plans for a $1.4 billion refinancing, which would have distributed a $187 million dividend to sponsor Madison Dearborn Partners. 

In May, the US-based candle manufacturer and retailer issued a statement indicating that it intended to redeem $188 million in outstanding 9.75 percent 2017 senior subordinated notes and $315 million of its 10.25 / 11 percent 2016 senior notes through a refinancing agreement that would have eliminated the company’s outstanding senior issuance.

The refinancing was contingent on the company’s ability to raise new debt financing, which it attempted to pursue through a $450 million senior issuance and a $950 million term loan. On 5 June, Standard & Poor’s gave the proposed term loan a B rating and rated the unsecured senior notes as CCC+ . The unsecured notes also carried a recovery rating of ‘6’, which indicates a negligible recovery of 0-10 percent in the event of a default.

Only one day after issuing a 12 June statement announcing its intention to issue the senior notes, however, Yankee Candle and its sponsors terminated the $450 million offering.

“The company does not intend to enter into a new term loan facility or to amend its asset-based credit facility, which were contemplated in connection with the consummation of the notes offering,” according to a US Securities and Exchange Commission filing relating to the announcement. As a result, no senior notes were redeemed and no dividends were issued.

The scuttled refinancing leaves Yankee Candle at a crossroads. Madison Dearborn was widely reported to be shopping the 44 year-old company in the weeks leading up to the rescission. The aborted auction process had generated bids from Bain Capital, Advent International, CVC Capital Partners, Clayton, Dubilier & Rice and Ares Management, according to a Reuters report. After the other firms lost interest, reports listed Bain as being the lone potential buyer for the company, which drove the price below the $2 billion mark.

Madison Dearborn ultimately terminated the deal. The firm declined to comment on this story, whilst a spokesperson for Yankee Candle did not respond to a request for comment.

So what’s gone wrong at Yankee Candle? Madison Dearborn acquired the company in 2007 in a transaction valued at about $1.7 billion, which included approximately $300 million in assumed debt. Madison Dearborn was Yankee Candle’s second private equity owner; its first was Forstmann Little, which took the company public in 1999. 

Although the business hasn’t exactly over-performed, it has demonstrated clear growth throughout the Madison Dearborn’s period of ownership. Its retail business has expanded from 463 stores at the start of 2009 to 568 at the end of 2012, and 52-week sales have grown from $785.7 million at the end of 2011 to $844.2 million for the period ending 29 December, 2012.

Some of this growth can be attributed to the improving economy, as the company relies on consumers’ discretionary spending which has trended upwards in the US, according to Gallup research. Consumer confidence – another critical economic factor Yankee Candle lists as a risk factor in its annual report – hit a six year peak at the end of May.

“We are gaining traction from the strategic investments we have been making in our growth businesses, as well as in consumer insights, digital marketing, systems and talent to drive our core businesses,” said chief executive Harlan Kent following a first quarter earnings statement.

Although the strong economic forecasts are certainly good news for Yankee Candle, the company does face challenges. Net income has stagnated over the last year. Madison Dearborn’s input helped to elevate the company’s 52-week net income from $16.4 million in 2009 to $54.5 million in 2011, but only managed a minor increase to $56.3 million last year, according to its annual report. Furthermore, Yankee Holding Corporation’s 52-week EBITDA has fallen from $188.4 million at the start of 2011 to $181.5 million at the end of 2012, according to the report. (Adjusted EBITDA, which takes into account equity-based compensation, Madison Dearborn advisory fees, loans on debt extinguishment and other factors, grew from $193.9 million to $206.2 million over the same period).

The company has also racked up a substantial $1.16 billion outstanding debt load, and the $654.4 million it had outstanding on its term loan facility as of 29 December is exposed to variable interest rates (the Eurodollar Rate, subject to a 1.25 percent floor plus 4 percent, or the ABR with a 2.25 percent floor plus 3 percent). That substantial level of indebtedness could make it more difficult for the company to satisfy its obligations, according its annual report, a situation that could be compounded should the economy take another turn for the worse.

With such a hefty debt load, it’s no surprise that Madison Dearborn opted for a refinancing after its sale process collapsed. Several media reports took the scuttled refinancing as a bellwether for a wider slowdown in debt markets. After all, interest rates inched their way up through the latter half of June in anticipation of the US Federal Reserve meeting held 19 June. Although the Fed left interest rates untouched, expectations of higher rates may have led some borrowers to rethink possible refinancings moving forward, one source told Private Debt Investor.

The daily five-year treasury yield curve rates have increased from 1.03 percent at the start of the month to 1.24 percent through 19 June, according to the US Department of the Treasury. This has reportedly led to a decline in the new issuance of junk and investment-rated bonds, which had soared through most of the year, according to reports. Global debt issuance fell to $43 billion for the week ending 14 June, which constituted a year-to-date low, according to Susquehanna Financial Group.

As of press time, it’s unclear how lenders will respond now that the Fed has stood still (for now) on raising interest rates. Though if credit markets were to stabilise, it’s not far-fetched to believe that Yankee Candle and its owners may be able to reenter discussions for another refinancing.

At the very least, here’s hoping the future smells a little bit better.