by Reshmi Basu, Danielle Randall-Saba, and Jon Berke
Bankers from BoA Merrill Lynch have been rounding up investor interest in a potential refinancing for Tops Holdings, according to three sources familiar with the situation.
Tops’ ability to refinance its capital structure has been a front and center issue for investors, given its high leverage and thinning liquidity profile, the sources continued. The grocery chain is under the gun to address an USD 85.5m 8.75%/9.5% holdco stub note due next year on 15 June. And then in 2022, the company must deal with a USD 560m 8% senior secured notes.
The issuer’s 8% senior secured notes due 2022 changed hand at 87.875% to yield 11.182% on 8 May, compared to 82.5 at the start of March, according to MarketAxess. The 8.75% holdcos last traded at 80 to yield 29.073% on 15 March.
The company could use cash on the balance sheet, revolver drawings or capacity under credit lines, including ABS lines – which would need bond waivers – to make good on the obligation, but liquidity would become exceedingly tight thereafter, sources noted.
Tops ended FY16 with just USD 64.5m of liquidity, split between USD 25m of cash and USD 39.5m of availability under its USD 150m ABL facility due 2021—after netting out USD 22.8m of LCs and USD 72.9m of borrowings, according to SEC filings. The facility is split between a USD 140m revolver and a USD 10m FILO- both of which are backed by inventory, prescription files, credit card receivables, trade receivables and other reserves, SEC documents showed. The company has the option to upsize the facility to USD 190m, if certain conditions are met.
With its deteriorating fundamentals, Tops may not have the wherewithal to grow into its capital structure. As such, the company is exploring M&A transactions or tuck-ins to increase its scale, giving it the bandwidth to then pursue a refi, said a fourth and fifth source familiar.
Last year Tops was in pursuit of family-owned Price Chopper Supermarkets, but was outbid by Albertson’s, according to two sources. But since Albertson’s has dropped its pursuit to buy the grocer, Tops executives are again weighing another strategic combination with Price Chopper, said three additional sources familiar.
Price Chopper, based in Schenectady, New York, operates more than 100 stores in upstate New York, Connecticut, Pennsylvania. Vermont, Massachusetts, and New Hampshire. There is considerable overlap between the two strategics in terms of geographies, and therefore such a marriage could require divestures to pass regulatory approval, said one of the sources. Rivals Wegman’s and Walmart also hold considerable market share in those localities, according sources noted.
Tops itself operates 172 stores, with a lion-share of operations in upstate New York, along locations in Vermont, Massachusetts and Northern Pennsylvania, according to SEC filings.
Tops is having a tough go of late, as its earnings have been impacted by food deflation, a promotional environment and lower federal funding for the Supplemental Nutritional Assistance Program (SNAP), according to SEC filings. To grow its top-line, the company has been expanding its store base with the addition of nine stores during FY16.
In 4Q16, net sales stood at USD 585m, down 2.9% from USD 602m in the prior year period. Adjusted EBITDA in the quarter was USD 24.8m, compared to USD 30m last year.
For 2016 ended 31 December, the grocer posted a 2.4% increase in sales to USD 2.3bn, when excluding the extra sales week in 2015. For the full year, adjusted EBITDA was a touch softer to 130m, versus USD 132.7m in 2015.
The results pegged leverage at 6.6x, based on USD 862m of debt- which includes USD 149.7m of capital leases.
Looking ahead, the company has warned that food price deflation would continue to play spoiler in 1H17 and has guided for USD 20m- USD 25m of capital expenditures in 2017.
On 8 May, Standard & Poor’s lowered the rating to CCC+ from B-, citing increased refinancing risk and weak cash flow generation.
Messages left with Tops were not returned. A BofA representative declined comment while a spokesperson for Price Chopper said the company doesn’t respond to market rumors.