Termsheet: Quiksilver

Quiksilver’s demise is a lesson in the peaks and troughs involved in lending to fashion brands.

The surfwear company, which filed for bankruptcy protection in September, was all the rage among teenagers in the late 80s and 1990s, appealing not only to surfers and skateboarding enthusiasts, but also those seeking to emulate the misfit lifestyle.

After going public in 1986, there fol- lowed expansive acquisitions and store openings before the financial waves almost wiped the company out, forcing it to close about 27 outlets, including in Times Square.

Part of the problem is that the style, perhaps even the lifestyle that the brand sold itself on, went out of fashion some- time after the turn of the century. Then followed the global financial crisis and ensuing recession, sending custom- ers away from Quiksilver’s specialised, branded and expensive products to cheaper retailers such as H&M.

Lenders and analysts that follow Quiksilver don’t think the company is set to go out of business, but it will need to shrink and rein-in costs significantly before it can turn performance around. “It takes a lot of money and a lot of time to turn these things around and to restructure. But they have the capital available for that and it’s a strong brand that has potential,” says Andy Moser, who heads up a new retail vertical at Monroe Capital.

Neither Monroe, not Moser’s prior firm, Salus Capital, has exposure to Quiksilver.

The company’s sales dropped by 13 percent in 2014 as Quiksilver posted a $309 million net loss. Outstanding debt reached $826 million while assets totalled just $337 million, according to the bankruptcy filing.The restructuring deal ultimately garnered support from 73 percent of Quiksilver's senior secured lenders.

The retailer’s outstanding debt included: $280 million 7.785 percent senior secured notes due 2018; $220 million 8.875 percent senior unsecured notes due 2017; and $223 million 10 per- cent senior unsecured notes due 2020. The restructuring plan erases $500 mil- lion of that debt. The bankruptcy pro- ceedings only apply to Quiksilver’s US business, its European and Asian opera- tions are independent and unaffected, the company said.

When the Huntington Beach-based com- pany filed for protection in September, it said that Los Angeles-based distressed debt specialist Oaktree Capital Manage- ment would step in with a $175 million bankruptcy financing alongside Bank of America. As part of the deal Oaktree exchanged its debt for a majority equity stake. Oaktree held $225 million-worth of senior unsecured notes due to mature in August 2020. They were traded in at
8.5 cents on the dollar in mid-October.

On 17 November, Quiksilver filed an amended Chapter 11 plan which reduced the senior asset-backed debtor-in-pos- session (DIP) financing to $120 million. Under the plan the firm’s 8.875 percent 2017 euro notes will be repaid while hold- ers of the 7.875 percent senior secured notes maturing in 2018 are set for a $279 million payout.The plan allows for hold- ers of Quiksilver’s 10 percent unsecured bonds maturing in 2020 to share 82 per- cent of a $7.5 million cash payment by the company.

Media reports suggest Oaktree was set to hire AlixPartners to advise on the takeover and restructuring. Bloomberg also reported that Oaktree was consider- ing combining Quiksilver with Billabong, a surfwear company based in Australia, in which its holds a 20 percent stake.

Both Oaktree and Quiksilver declined to comment for this story.

“Our fresh capital structure, with a very low level of debt for our industry, will enable us to invest in and reinvigorate our brands and products.We are confident we will emerge a stronger business, better positioned to grow and prosper into the future,” said Pierre Agnes, chief execu- tive at Quiksilver, in a statement on the bankruptcy proceedings.

“Oaktree’s financial strength and expertise, deep experience working with companies in situations similar to ours, and successful history operating in our industry make them an exceptional partner for us going forward.”

Quiksilver is reportedly talking to other potential private equity bidders, but Moser notes that any investor getting
involved in a turnaround like this may need to wait to get the company back on its feet. “They need to have patience.

It’s like steering the Titanic sometimes and they need to have the ability to do that,” he says.

Quiksilver isn’t the only once high-flying US apparel company to seek protection this year. Wet Seal filed for bankruptcy protection in January. The company defaulted on $27 million in senior convertible notes last December. Wet Seal’s restructuring plan saw B Riley Financial acquire an 80 percent equity stake in exchange for a $20 million loan. American Apparel also filed for Chap- ter 11 bankruptcy in October. Some of the company’s lenders approved a debt- for-equity swap. Coliseum Capital Man- agement, Goldman Sachs Asset Manage- ment, Monarch Alternative Capital and Pentwater Capital Management agreed to convert over $200 million-worth of out- standing 13 percent senior notes issued in 2013 into equity. These firms are also providing American Apparel with $90
million DIP financing.

All these brands have faced similar challenges. Trends and fashions among young consumers change quickly. It’s important to expand rapidly to capture any spike in popularity, but it’s more dif- ficult to pull back when that wains.

As well as fickle fashion, companies also now face fierce competition from online retailers, as well as international and newer brands competing for store space.

Moser says mall leases have recently been going to international brands like Zara and Uniqlo, or the US-based H&M, and if a retail chain loses out in the malls, it’s difficult to maintain market share.

Retail, while attractive to some, remains challenging for any lender, par- ticularly when the tide of another credit cycle is set to turn against you. 

TIMELINE

  • 1969: Retailer is founded in Australia
  • 1976: Surfing champions Jeff Hakman and Robert McKnight junior co-found Quiksilver US
  • 1986: Quiksilver US goes public
  • 2002: The US business purchases the original Australian unit
  • 2005: Buys winter sports company Rossignol
  • 2008: Sells Rossignol for less than half the original $320 million price
  • 2013: Sells snowboard subsidiary Mervin Manufacturing for $58 million, purchases minority interests in joint ventures in Mexico and Brazil, raises €60 million European credit facility and announces plans to divest non-core businesses
  • January 2014: Sells its licensed apparel subsidiary Hawk Designs for $19 million
  • 2014: Sales drop by 13 percent, Quiksilver posts a $309 million net loss
  • September 2015: Files for Chapter 11 bankruptcy protection