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From Elle to Heidi Klum, to Stella McCartney: Bendon's breached banking covenants and the Naked deal

Thursday 26th April 2018

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Bendon will have to repay Bank of New Zealand US$20 million to keep its lender onside through a planned merger with Nasdaq-listed Naked Brand Group, after mounting losses led to the underwear maker breaching banking covenants. 


The planned merger was first touted at the start of last year in what was effectively a reverse listing for the New Zealand company controlled by NBR rich lister Eric Watson, providing a lifeline for New York-based Naked, which was at risk of losing its Nasdaq listing when its stockholder equity dropped below US$2.5 million. 


Naked Brand shareholders are expected to vote on the agreement this week at a special meeting, where they will be diluted down to just 8.35 percent of the merged entity, after a fourth amendment to the deal on April 23.


The accompanying filings to the US Securities and Exchange Commission show Bendon's own operations have struggled, with the Kiwi lingerie maker's audit reports showing a "substantial doubt about Bendon's ability to continue operations in the future as a going concern" with accumulated losses of $54.1 million as at July 31 and negative equity of $14.8 million. 


Bendon has been in breach of its debt to earnings before interest, tax, depreciation and amortisation ratio since the December 2016 quarter and in December last year and February this year, BNZ issued letters to the lingerie maker that the lender "expressly reserved its rights" under the agreements. 


On March 16, BNZ wrote to Bendon offering its support of the Naked merger and agreeing to provide financial accommodation on the basis Bendon repays US$20 million immediately following the transaction, the SEC filing said. Bendon said it's seeking those funds through an unregistered Private Investment in Public Entity, where an issuer typically sells shares at a discount to the market price, or by raising capital from existing or other parties. The outstanding bank debt would sit at NZ$10 million after the repayment. 


Since the July 31 balance date, Bendon has raised US$2.6 million through a convertible note and sold shares totalling US$17.45 million to its major shareholder and other unrelated parties. The company also has an outstanding shareholder loan attracting 30 percent annual interest of $9.5 million with Watson's Cullen Investments, which owns 72 percent of Bendon, and which will be converted to equity in the merger. 


BNZ only came on board in mid-2016, replacing a $17.8 million loan, $18.1 million overdraft and a $3.4 million facility to purchase receivables with Australia & New Zealand Banking Group. Bendon breached  ANZ lending covenants in the 2015 financial year. 


Bendon's revenue fell 12 percent to $59.8 million in the six months ended July 31 2017, from a year earlier, reporting a net loss of $19.2 million compared to a previous loss of $13.8 million. Ebitda was a loss of $16.4 million in the first half compared to positive ebitda of $4.3 million a year earlier, with its New Zealand retail and wholesale, and European wholesale divisions the only profitable segments. 


"The loss from continuing operations is as a result of the group not having sufficient inventory necessary to achieve higher sales, as a result of suppliers not being able to supply inventory and the finalisation of the transition of its major brand from Elle MacPherson to Heidi Klum Intimates," the filing said. "The group has continued to incur losses since 31 July 2017 as a result of continued challenging conditions and still not having sufficient inventory necessary to achieve higher sales.


"However, the group has reduced and will continue to reduce the overheads of the business to the extent required to improve the financial results."


The filings show Bendon's operating cash outflow widened to $8 million in the six months ended July 31 from $4 million a year earlier but said forecasts for 2018 and 2019 indicate it "will be able to pay their commitments as and when they fall due". 


Among the question marks hanging over its future is the merged entity's ability to replace sales of Stella McCartney products when the licence agreement ends on June 30, 2018. Its 2016 forecasts for the merger included retaining the Stella McCartney licence, predicting the merged entity would generate ebitda of US$17.7 million on revenue of US$126.4 million in calendar 2017, rising to earnings of US$35.6 million on sales of US$202.6 million in 2020. 


In an effort to mitigate the loss of the Stella McCartney brand, Bendon is in advanced talks with the owner of FOH Online Corp to buy the Frederick's of Hollywood licence for US$17.7 million in scrip and assumed debt. 


If the merger goes ahead, Watson's stake, via Victoria Equities, will shrink to 33 percent and Bendon's executive chair Justin Davis-Rice's holding will rise to 19 percent. 


One of the conditions of the merger is the new entity listing on the Nasdaq or New York Stock Exchange and has applied to the Nasdaq to trade under Naked's existing ticker. In February, Naked was told its failure to hold an annual meeting in the year ended Jan. 31, 2017 meant it didn't comply with listing rules, it's been granted an extension until July 30 this year to hold the meeting or be delisted. 



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