North America High-Yield Bond: Gap’s US$2.25bn senior secured bond

IFR Awards 2020
3 min read
David Bell

Bridging the gap

Gap’s US$2.25bn senior secured bond offering in April was the largest bond ever sold in the high-yield clothing sector and one that solved the retailer’s liquidity pressures during the Covid-19 pandemic when the junk bond market was only at the early stages of recovery.

The retail sector is one of the hardest hit sectors by the pandemic, with nationwide lockdown orders forcing Gap to shutter all of its North American stores in March, on top of changes in consumer demand and sentiment, and the impact of the virus on supply from China.

This clearly put liquidity pressure on the company, which was facing a looming US$1.25bn bond maturity in April 2021.

After the company’s share price fell to a 25-year low of US$5.65 on April 3, Gap hired Morgan Stanley to arrange a blockbuster deal that would take care of the upcoming maturity and give the company the liquidity runway it needed to see out the pandemic.

The bank, which had no previous lending relationship with the issuer, delivered a US$2.25bn secured bond offering on April 23 that was arranged in just one week. Bank of America, JP Morgan and Citigroup were also on the deal as bookrunners. *

Alongside a new US$500m asset-based credit facility, the three-tranche offering paid off the April 2021 maturity, paid down US$500m of a revolving credit facility and put US$916m of cash on the balance sheet.

“We structured these deals so that companies had enough capital and liquidity to make it through not just the next six months but to the end of the pandemic,” said Clarke Adams, head of North America leveraged finance syndicate at Morgan Stanley.

“That really is what the market valued in all these Covid-19 financings and Gap is the poster child for that.”

Gap was one of many companies that had to find collateral to secure new debt during the pandemic.

The company’s San Francisco headquarters proved to be an attractive asset alongside intellectual property and branding, giving investors comfort in investing at a period of distress for retailers, and brought the cost of financing down to a palatable level.

Leads landed a US$500m three-year bullet note at 8.375%, a US$750m five-year non-call two at 8.625% and a US$1bn seven-year non-call three at 8.875%, bringing those tranches 12.5bp tight of price talk and 62.5bp inside initial whispers.

“It was an incredible amount of work done in a very short period and a real display of commitment by the Gap team,” said CFO Katrina O’Connell on the company’s first-quarter earnings call on June 4. O’Connell became CFO in March just as lockdown measures came into force. “Taking these actions put Gap in a strong financial position and will improve the structural economics of the business,” she said.

* This paragraph was corrected to give the right bookrunners.

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