Bond Investments – Top 3 Consumer Apparel High Yield Bonds
By Rom Badilla, CFA
October 15, 2012
Consumer spending has been lackluster as of late but there is evidence to suggest that housing is picking up which is a good sign. As we have seen in the past, gains on the housing front coupled with rising equity markets, can rejuvenate consumer spending via the wealth effect. In other words, as people can see their assets improve in value, the more secure they become in their financial well-being. This confidence and feeling of being richer, whether real or not, can translate into spending and add to economic growth.
Such a scenario should bode well for bonds that are tied to the consumer. Coupled with modest expected revenue growth, low costs on materials such as cotton prices which have dropped from their lofty levels set in the early part of this year, should continue to benefit the sector.
In particular, below are details of three high yield corporate issuers in the Consumer Apparel industry. Information and market quotes on the bond investments are provided by Trade Monster’s Bond Trading Center (unless noted otherwise). Furthermore as a gauge of the overall credit worthiness of the company, we provide some simple credit metrics of each company, two leverage ratios and a ratio that represents a company’s ability to service its debt payments.
Here we will cover two ratios that are used to gauge the amount of debt or leverage that a company has on its balance sheet. The Long Term Debt to Total Assets ratio measures a company’s leverage by determining the percent of assets have been financed by debt. A higher percentage indicates more leverage and more risk.
In addition, the Debt to EBITDA ratio which is represented as a multiple, measures how easily debt can be repaid using a company’s cash flow. EBITDA which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is one measure of profitability. Also, for this particular ratio, we will use the past 12 months of EBITDA. An easy way to interpret this ratio is to say that a company that has a ratio of ‘2x’ would mean that it would take two years’ worth of cash flow to repay its debt. So, a lower multiple is better.
There are two components that make up the next ratio, EBITDA and Interest Expense which is the cost of debt. By dividing EBITDA by the Interest Expense, you have the Interest Coverage ratio which measures a company’s ability to service their debt. In other words, it shows how easily a company can pay interest expense given their profitability. A higher Interest Coverage Ratio implies better credit health since it is making enough money to stay current with their debt interest obligations. Conversely, a red flag is raised when this ratio approaches 1.5 or lower since its ability to pay the interest on their debt is questionable.
The Jones Group, Inc. (JNY) is a leading apparel, footwear and accessories company with a portfolio of over 35 brands that includes Jones New York, Anne Klein, Nine West, Gloria Vanderbilt, Easy Spirit, Bandolino, Stuart Weitzman, and Kurt Geiger. The company markets directly to its customers through its branded specialty retail and outlet stores and through its e-commerce sites. The New York based company has over 1000 employees and was founded in 1970.
According to Bloomberg data, The Jones Group has relatively low leverage. The Long Term Debt to Total Assets ratio of 31.6% while the Debt to EBITDA ratio stands at 3.9x as of the end of second quarter.
As for its ability to cover the cost of debt, the company has more than enough in profits. The Interest Coverage ratio stands at 4.9x using last quarter data. Using the data for the past year, the ratio is at 4.2x.
For this company, we will focus on their bond that pays a semi-annual coupon of 6.875% and matures on March 15, 2019 (48020UAA6). The bond is a senior note and is straight bullet maturity with no embedded early call feature. In addition, the bond deal size is $400 million outstanding and was originally issued in 2011 so this bond is actively traded. These senior notes are currently being offered at a dollar price of $104.00 which translates to a yield to maturity of 6.11%. Bonds can be sold with little concession relative to the offered side.
This bond is rated B- by Standard & Poor’s and Ba3 by Moody’s which falls under the High Yield spectrum.
A similarly rated issuer in the Consumer Apparel sector is Levi Straus & Company. This privately held firm which was founded in 1853 is a branded apparel company that designs and markets jeans, casual and dress pants, tops, jackets and accessories for men, women and children under the Levi’s, Dockers and Signature by Levi Strauss & Co. brands. The company is headquartered in San Francisco, California and has over 16 thousand employees around the globe.
Levi Straus & Company has more leverage in relation to its total assets in comparison with The Jones Group. The Long Term Debt to Total Assets ratio is at 55.3%. That said, from a cash flow standpoint, the company has a similar Total Debt to EBITDA ratio of 3.8x according to Bloomberg data.
In addition, the apparel company has an Interest Coverage ratio of 3.6x for the most recent quarter. On a trailing 12-months basis, the ratio is at 3.3x.
The company has three bonds outstanding. We will focus on their bond that pays a semi-annual coupon of 6.875% and matures on May 01, 2022 (52736RBD3). The total deal size of this bond is $385 million. In addition, it is a senior note with multiple early call dates with the first on May 1, 2017 at a dollar price of 103.438.This bond is currently being offered at a dollar price of $104.125 which translates to a yield to maturity of 6.29%. The yield to worst which is the lowest yield out of all call date scenarios is 6.18%. As with the other bond, this bond is quoted on both the bid and offered side so bonds can be actively traded with little price concession.
Standard & Poor’s rates these senior notes at B+ while Moody’s provides a rating of B2.
Quiksilver, Inc. (ZQK), is a global apparel and sports equipment company. The company’s apparel and footwear brands, Quiksilver, Roxy and DC, focus on a casual lifestyle with an emphasis on surfing, skateboarding, snowboarding, skiing and other outdoor sports. The American based company with over seven thousand employees sells products through company-operated retail stores and third-party retailers in the Americas, Europe, and in Asia.
The company has above average leverage compared to its peers but overall, reasonable amounts of debt. The Long Term Debt to Total Assets ratio is 41.9% while the Debt to EBITDA ratio is at 5.9x as of the last quarter.
In terms of its ability to the company’s ability to pay off interest expense with the cash flow it generates, the Interest Coverage ratio is at 2.7x using the latest month’s EBITDA. Using the EBITDA over the past year, the Interest Coverage ratio is at 2.2x.
Furthermore, the company has sufficient liquidity with $82 million of cash on their balance sheet and an additional $117 million of short-term credit lines available for a total of $199 million of liquidity.
Quicksilver features a bond that pays a fixed semi-annual coupon of 6.875% and matures in April 15, 2015 (CUSIP# 74837NAC7). The senior notes which have a deal size of $400 million have two call dates with the first set for November 9, 2012 at $100. The bonds can be bought at a dollar price of $100.25 for a yield to maturity of 6.76%. The yield to worst is 6.35% at that same dollar price. The bonds are effectively bid and can be sold back currently at $99.00 according to Trade Monster’s Bond Trading Center.
Given the company’s credit profile of higher leverage and lower level of cash flow to service its debt in comparison to its competitors, the ratings agencies places Quicksilver on the lower end of the High Yield spectrum. Standard & Poor’s rates these senior notes at CCC+ while Moody’s gives these bonds a Caa1 rating.
All of the aforementioned bonds of the issuer were highlighted by finding the best yield given the dollar price. Some bonds yielded higher but at a cost of a higher dollar premium.
Furthermore, keep in mind that corporate bonds trade over-the-counter. So, prices and yields can vary depending on the broker you use. The best suggestion is to use a broker that offers the most visibility and price transparency for the corporate bond market. This can be achieved by comparing the price to buy and the sale price (aka bid-ask spread). The closer the differential usually means the better the liquidity.
As always, every bond investor should perform their own due diligence when making their investment decisions.
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