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[Editor’s Note: This updates LFI’s previous Michaels story, published earlier today. The update includes additional reporting on Q3’23 earnings and management commentary in the third, fourth and fifth paragraphs.] 

Michaels Stores’ stoked LME concerns in the market today when, in conjunction with the release of Q3’23 earnings, management disclosed a distribution of 100% equity in its e-commerce segment to sponsor Apollo, sources tell LFI. The entity, called MiKraft, is a fresh recipient of $65 million in cash from the parent via an intercompany note, sources added.

With MiKraft now sitting outside of the restricted group, some investors are concerned the Apollo-owned retailer could use the new box to orchestrate distressed exchanges, asset transfers or other LME-type maneuvers to extend its runway, sources said. (Covenant Review has analyzed the company’s credit agreement and bond indentures, with reports available here.)

During this morning’s earnings call, management said it doesn’t foresee any liquidity needs surfacing over the medium term, sources said. Further, management disclosed that post-Q3 end, the company funded a paydown of some revolver borrowings.

Performance in Q3 continued a downbeat trend, as same-store sales fell 7%, coming in a bit below expectations, the sources said. Adjusted EBITDA, however, slightly beat consensus estimates of $110 million-$115 million to come in at $131.3 million for a 1.5% year-over-year decline. The bottom line benefited from better gross margins, according to the sources, who added that management projects margin improvement and revenue to be at the same levels in the fourth quarter.

On the operational front, the company announced the launch of a new marketplace operating similar to Amazon for sellers. The new initiative booked $1 million in sales in Q3, sources said.

The Apollo-owned art craft retailer’s management had previously warned that third-quarter earnings would be below expectations, as foot traffic has been slow earlier, as reported. The issuer was downgraded to CCC+ from B- by S&P in October. The rating agency cited weak customer demand, “suppressed” free operating cash flow and high leverage.

The Michaels term loan due April 2028 (S+ARRC CSA+425, 0.75% floor)—initially sized at $1.95 billion—is bracketing 78, roughly unchanged from yesterday, sources noted. The term loan stems from Apollo Global’s $5 billion take-private LBO of the company in 2021, alongside the first-lien and unsecured notes.

The Michaels $850 million 5.25% first-lien notes due 2028 were the most active this morning, changing hands at either side of 72, down approximately a point versus trades yesterday afternoon and going out last month, according to sources and trade data. The 7.875% unsecured notes due 2029 were less active, but quoted at 54.5-55 market, down from 56-57 yesterday.

The company’s most recent capital structure intervention was a buyback of a $39.5 million slug of the 7.875% unsecured notes due 2029 for $27.3 million in cash over the summer. That buyback cut the tranche to around $1.23 billion outstanding.

Messages left for the company were not returned as of press time.

Skylar Chen
M: +1 646 420 4038

Erica Carnevalli
M: +1 917 770 6402

Kerry Kantin 
M: +1 646 276 7603

Peter Agra
M: +1 862 218 9861


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