Business Context and Reporting Period
Company: Designer Brands Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: June 23, 2023
Reporting Period: The filing reports on events occurring on June 23, 2023, specifically the entry into a new Term Loan Credit Facility, an amendment to an existing Asset-Based Lending (ABL) facility, and an update to a tender offer for the company's Class A common shares.
Key Financial Metrics and Capital Structure
- New Term Loan Facility: Maximum aggregate principal amount of $135,000,000.
- Initial Drawdown: $50,000,000 at closing ($45,000,000 by the Company and $5,000,000 by Designer Brands Canada Inc.).
- Delayed Draw Facility: Up to $85,000,000 available within 90 days of closing ($76,500,000 by the Company and $8,500,000 by DBI Canada).
- Accordion Capacity: Uncommitted accordion of up to $50,000,000.
- Interest Rates:
- Base Rate Option: Base rate (greater of 2.0%, Prime, Overnight Bank Funding + 0.5%, or 3-month SOFR + 1.0%) plus 6.0%.
- SOFR Option: Adjusted 3-month term SOFR (floor of 2.0%) plus 7.0%.
- Maturity Date: June 23, 2028.
- Collateral: First priority lien on personal and real property (including IP and owned real estate); second priority lien on credit card receivables, accounts receivable, and inventory.
- ABL Facility Amendment: Applicable margin on loans increased by 0.25%.
Material Changes and Tender Offer Update
The filing details a significant modification to the company's previously announced modified "Dutch auction" tender offer to purchase up to $100 million of Class A common shares:
- Price Range Increase: The purchase price range was increased from $7.00–$8.00 per share to $8.75–$10.00 per share.
- Financing Condition Satisfied: The tender offer was originally contingent on securing $135 million in term loan financing. This condition has been satisfied via the new Term Loan Credit Agreement described above.
- Expiration: The tender offer expires on July 7, 2023, at 11:59 p.m. New York City time, unless extended or terminated.
Covenants, Risks, and Management Commentary
- Leverage Covenants: The Term Loan requires the Company to maintain a maximum consolidated net leverage ratio if liquidity falls below $100,000,000:
- 2.00 to 1.00 through July 29, 2023.
- 2.25 to 1.00 through February 3, 2024.
- 2.50 to 1.00 thereafter.
- Events of Default: Includes payment defaults, covenant breaches, material inaccuracies in representations, change in control, and insolvency proceedings. An event of default may increase interest rates and fees by 2.0%.
- Use of Proceeds: Proceeds are designated for repurchasing equity interests (funding the tender offer), paying transaction fees, working capital, and general corporate purposes.
Investor Verification Checklist
- Verify the final acceptance rate and total shares tendered in the modified Dutch auction tender offer expiring July 7, 2023.
- Confirm the actual amount drawn from the delayed draw facility within the 90-day window following June 23, 2023.
- Monitor the company's liquidity levels to determine if the net leverage ratio covenants become active.
- Review the full text of the Term Loan Credit Agreement (Exhibit 10.1) for specific definitions of "liquidity" and "consolidated net leverage ratio."
- Check subsequent filings for the impact of the 0.25% margin increase on the ABL facility on overall interest expense.