The Deal: BCBG Faces Deadlines as Restructuring Continues

NEW YORK ( The Deal) -- Guggenheim Partners is on track to take control of BCBG Max Azria Group from founder and owner Max Azria, as the fashion house continues restructuring its debt with adviser Blackstone Group ( BX). The latest plan calls for the company to convert a portion of its $685 million in debt into equity, a source close to the situation said.

The Deal first reported that Guggenheim was likely to takeover the Vernon-Calif. based company in December; BCBG has been working on its restructuring ever since then, the source said.

What has mostly taken so long, according to one industry insider, is above and beyond the normal situation with family controlled companies where ties to the company are fraught with emotion. In this case, there is also the creative bond between a designer and his fashion line, which private equity owners had best take note of because consumers also identify brands with their creators.

Advisers to the parties are trying to structure a deal where Azria will accept a place as a minority stakeholder and stay with the company in a creative or advisory capacity, the source said. BCBG is being advised by Skadden, Arps, Slate, Meagher & Flom, while Weil, Gotshal & Manges is providing Guggenheim with legal advice.

BCBG did not respond to requests for comment.

At this point in the negotiations, it is not known how much of the $685 million in debt will be converted into equity, nor what size stakes Guggenheim or Azria will ultimately end up with at this point, the source said.

Despite BCBG's financial troubles, the source said Guggenheim is bullish on the brand's future potential once the company is restructured.

Standard & Poor's Rating Services in a July 16 report said it lowered BCBG's credit rating from CCC to CCC- and its outlook for the women's apparel retailer was negative.

The ratings service said that the company broke covenants on its revolving credit facility because there was a meaningful decline in revenue in 2011. The company reported $1.1 billion in revenue for that year, according to Moody's Investors Service Inc. The year before, Azria claimed the company generated $1.5 billion in revenue.

It was the breaking of those covenants that triggered the company's restructuring, a source told The Deal in December.

S&P, which said it expected the restructuring to occur in the next six months, also said the kind of debt for equity swap contemplated would be considered a default. "We believe this is the result of the company's weakened earnings and significant near-term maturities as its amended first-lien and second-lien term loan are due in the next several months," S&P analyst Helena Song wrote.

The company's debt ratings could go down to CC, while its corporate credit might go to SD and the issue-level rating on its first-lien loan to D when the restructuring takes place, she added.

BCBG has a first-lien term loan of $230 million and a second-lien term loan, in the neighborhood of $245 million, coming due in the next several months, Guggenheim holds both the first-lien and second-lien loans. The remaining portion of its $685 million, about $210 million, is what BCBG has drawn on a revolving credit facility, the source said.

BCBG, the ratings agency said, had a debt to EBITDA multiple of about 8.4 times, as of April 30.

Upon completion of the restructuring, Standard & Poor's said it would then review its rating under the new capital structure.

BCBG was founded in 1989 and is the acronym for " bon chic, bon genre," which is French for "good style, good attitude." It is said to operate more than 500 stores and generate over $1 billion in revenue.

Written by Richard Collings.

Jamie Mason contributed to this report.

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