Termsheet: Fashionably Flexible

The price of clothes has both tumbled and soared over the last few decades. Haute couture became the preserve of the wealthy while discounters like Primark and Walmart have slashed the cost of basics. Carving out a profitable womenswear niche between these two extremes is challenging as consumers are faced with a huge array of choices. And it was in this environment that private equity firm L Capital, and French private lender Tikehau Investment Management made a bet on ba&sh, a fast-growing French womenswear retailer.

 

THE DEAL

In April, Tikehau IM provided a €30 million unitranche facility to back L Capital’s acquisition of a 50 percent stake in ba&sh, says Jean-Baptiste Feat, co-head of private debt who led the deal for the firm. 

The founders and creative force behind the brand, Barbara Boccara and Sharon Krief, along with Dan Arrouas – their earliest investor and the serial entrepreneur behind Groupe VOG – retained the remaining 50 percent interest split three ways.

The six-year loan pays a mixture of cash margin and payment-in-kind (PIK) interest. The all-in pricing is around seven percent, PDI understands. Tikehau also has a warrant to enable it to benefit from equity growth within the company, Feat explains.

The bullet structure as well as the PIK interest allow ba&sh to defer much of the repayment to the end of the term, freeing up cash flows that would have to service amortisation and interest payments for investment in expansion, Eduardo Velasco, a partner at L Capital, adds.

In addition, Tikehau has constructed the deal to allow ba&sh headroom for other borrowing. The unitranche deal brings the company’s leverage to around 3x EBITDA, says Feat. The deal enables the retailer to borrow up to another turn of leverage, or €10 million, in credit lines to fund capital expenditure (capex). And it is that headroom, available in the early years of the growth plan when cash flows could turn negative, which is key to supporting growth, Feat adds.

“It’s a principle of unitranche; no one transaction looks like another one,” says Feat.

A key concession by Tikehau in structuring the unitranche was to be found in the excess cash flow ratio. Typically in leveraged deals, lenders require that a certain percentage of free cash flow be used to pay down debt. In a typical leveraged buy-out (LBO) that percentage would kick-in at 66 percent before falling as leverage falls. The numbers depend on the deal, adds Feat, but to help accommodate ba&sh’s ambitious expansion plans, the percentage is limited to 50 percent of free cash flow at opening leverage. In all other respects, covenants are pretty standard and would not be considered cov-lite, Feat adds.

The company is now starting to discuss capex lines with local bank providers, says Velasco. In France, the key money paid to landlords by leaseholders can be used as security for credit and so the firm will draw-down four to five-year rolling lines to help finance its expansion plans, he explains, adding that cash flows will also be key to the international drive.

 

THE PLAN

L Capital had been watching the progress of ba&sh for almost four years before it approached the founders about a potential LBO, Velasco explains. Between 2009 and 2014 it grew from 10 stores to 65 outlets while also pushing into the digital market and signing a distribution agreement with ASOS, one of the UK’s largest online womenswear retailers.

It also opened its first international stores in London and Hong Kong. So in May 2014, L Capital decided the time was ripe for the kind of accelerated expansion it could support and initiated discussions.

The brand’s positioning is highly attractive, says Velasco, adding that it lies somewhere between Céline and H&M. For PDI readers not fully up to speed with fashion short-hand, Céline is considered one of the most chic and modern, yet wearable, high-end French couture labels. H&M has exploded in popularity over the last few years as it produces cheap yet stylish clothes.

Ba&sh is aimed at women who want to be fashionable but require that the styles they buy are wearable. The target demographic has disposable income and wants higher quality than offered by the proliferation of cheap fashion stores but does not have the budget for the top-end luxury brands.

In the month since Velasco and L Capital sealed the deal, they have been busy putting their ambitious growth plans into action. The private equity firm is in discussions with distribution partners in Korea and the Middle East. In the UK, the brand is likely to try and go it alone.

The rise of online fashion retailers has also fed into L Capital’s strategy for the brand and Velasco confirms that discussions are in train with Net-a-porter, Matches Fashion, Yoox and MyTeresa. 

The costs of expansion will be managed as only about one-third of the point of sale expansion will be the brand’s own stores which are more expensive to establish. Another third will be through department store concessions with the remaining third through affiliates that buy stock and finance themselves, Velasco says.

The London store is on the Brompton Road in affluent West London. It is sandwiched between the kind of womenswear retailers that ba&sh competes with such as Sandro, Zadig & Voltaire and The Kooples. The strength of ba&sh against these brands, Feat says, is that it is not as niche and targets a wider audience than say the ‘rock’ aesthetic of The Kooples.

 

THE RIGHT FIT

L Capital spoke to other lenders as well as Tikehau, both Velasco and Feat confirm. But for Velasco, Tikehau was the right lender for a number of reasons not least because it does not shy away from retail like some others. “The perception of some lenders about retail might sometimes not be the best, but there are many success stories to be done,” says Velasco.

The lender understood the dynamics of ba&sh, says Velasco, adding that when L Capital brought the final business plan and agreement to Tikehau, it moved fast to close the financing in a short period of time.

Pricing was far from the deciding factor in which lender to go for. “You can have a very good pricing but from someone who is trying to put in covenants that don’t work with this type of business,” explains Velasco.

“You want to be with a partner who understands what you’re doing, who trusts you and who is of course flexible and reactive,” he says.

This is why a unitranche was always the type of financing that L Capital wanted backing the deal. The firm could get a standard LBO bank deal tomorrow but the amortisation would render the ba&sh business plan implausible, Velasco argues.

For Feat, it’s pretty simple: “They recognise that we are what we say; a pragmatic, flexible lender. We are able to deliver a tailor-made solution.”

 

THE RISKS

While the French market has some fans, it’s also had many detractors in the period since the global financial crisis. France’s banking sector was badly hit by Greece, short-term money market withdrawals and the impact of new regulation. And though it picked up in the first quarter of this year, annualised rates of growth in French gross domestic product have been under one percent for the last two years.

Of course, rather than a risk, you could argue that the economic back-drop proves the strength of a brand that has grown from nine stores to more than 60 over five years in a domestic market that has been marked by low consumer spending.

That doesn’t mean there aren’t any risks. Feat acknowledges that fashion brands rise and fall all the time. If ba&sh isn’t tapping into the current vogue, it will disappear, because as Feat says, it does not have the iconic status of a long-lived brand like Hermes.

That is why it was important for Tikehau to treat this as almost an equity investment. The French private debt provider is not simply doling out money and waiting to be repaid. ““At the end of the day this is really almost like a private equity investment with that depth of analysis, but for credit. It’s about how much we trust the business and how much we trust L Capital,” says Feat.

If things go wrong, there are no real estate assets to take charge of, he adds.

“I like this sector, this is typically the type of deal where we have something to bring in terms of value. That’s what we’re here for; to give flexibility, to be able to understand businesses and sectors and get comfortable with those. That’s where we add value for our investors and it’s also where we deliver value for the borrowers,” Feat concludes.

 

THE RELATIONSHIP

For both Feat and Velasco, the relationship between Tikehau and L Capital was also important. L Capital has previously worked with Tikehau and is confident that it understands retail in the same way that the private equity house itself does, says Velasco.

From Tikehau’s perspective, if you’re going to lend to a brand, it makes sense to do it in partnership with a sponsor with expertise. And for Feat, L Capital as the private equity arm of LVHM, the listed French luxury brand group, has the right credentials. 

Deals like ba&sh, in a less than popular sector and with a sponsor keen to push the typical lending boundaries with a structure that works for the business, are what unitranche as well as private debt is really made for.

And if all goes to plan for ba&sh, Tikehau’s investors will find it a comfortable fit too.