After defaulting on its roughly $93.85 million in debt, denim apparel maker Joe's Jeans Inc. (JOEZ) is in talks with its lenders in the hopes of reaching an amendment or waiver to avoid an immediate debt repayment.
The Los Angeles designer, producer and seller of apparel and apparel-related products under the Joe's and Hudson brands disclosed in a filing with the Securities and Exchange Commission that it failed to comply with the Ebitda covenant on its term loan as of Sept. 30, causing a default on its debt.
The company's $60 million term loan with administrative agent Garrison Loan Agency Service LLC was priced at 12%, but the interest rate increased by 200 basis points, to 14%, due to the default, the Nov. 14 SEC filing said. The company owes roughly $59.93 million on the term loan, which is set to mature on Sept. 30, 2018.
Joe's Jeans also is in default on its revolving credit facility and factoring facility with CIT Commercial Services Inc. About $33.93 million is outstanding on the financing, and $13.73 million is available to borrow, the SEC filing said.
The $50 million revolver matures on Sept. 30, 2018, and consists of a $1 million tranche and a $50 million tranche, minus what is outstanding on the $1 million tranche. The smaller tranche is priced at an alternative base rate plus 250 basis points or Libor plus 350 basis points, while the larger tranche is priced at Libor plus 250 basis points.
The alternative base rate is equal to the greatest of prime, 50 basis points over the Federal Funds rate, 100 basis points over Libor and 1.5%.
The company said it is negotiating with the lenders to obtain an amendment or waiver of the default. Joe's Jeans warned, however, that because of the default, the lenders have the right to accelerate the outstanding debt.
"Any such acceleration under our credit facilities would have a material adverse effect on our liquidity, financial condition and results of operations and could cause us to become bankrupt or insolvent, if not resolved," Joe's Jeans said in the filing.
Joe's Jeans took on $110 million in loans in September 2013 when it closed its $94.1 million acquisition of Hudson Clothing Holdings Inc.
The deal was supposed to add a younger consumer to Joe's Jeans designer denim mix. Hudson Jeans rose to fame with billboards of celebrity offspring Patrick Schwarzenegger and Georgia May Jagger wearing their jeans and nothing else, a savvy marketing move that helped the brand catch on with consumers over the past decade.
Hudson Jeans also helped to double the size of Joe's Jeans, and it was thought that combining the two would lead to cost-saving synergies. As the market and demand for designer denim continued to fade, however, Joe's Jeans ended up being saddled with a lot of debt.
The Hudson Clothing deal included $65.42 million in cash and $27.45 million in convertible notes, subordinated and junior to Joe's other debt, as well as another $1.24 million in promissory notes that were repaid in April.
Fireman Capital CPF Hudson Co-Invest LP received $9.56 million of the convertible notes, with the debt priced at 6.5%, with 3% paid in cash and 3.5% paid in kind, until Nov. 30. After that, the notes will be priced at 6.5% in cash until Oct. 1, 2016, when the interest rate will increase to 7% in cash until the notes mature on March 31, 2019.
Hudson's management shareholders received the remainder of the notes, priced at 10%, with 7.68% paid in cash and 2.32% paid in kind, until Nov. 30. After that, they will accrue interest at 10% cash per annum, until Oct. 1, 2016, when the interest rate will increase to 10.928% in cash until maturity.
According to the company's most recent financial report, filed with the SEC on Oct. 9, the company had $227.42 million in assets and $158.78 million in liabilities as of Aug. 31. The company had $964,000 in cash on its balance sheet.
The company reported $437,000 in net income on $148.18 million in net sales for the nine months ended Aug. 31.
Joe's Jeans is both a wholesaler and retailer of its denim products. The company operates 13 full-price retail stores and 20 outlet stores in outlet centers, malls and street locations around the country.
Formerly known as Innovo Group Inc., the company originally was a licensee of Joe's Jeans' intellectual property, but it acquired the IP by merging with the owner, JD Holdings Inc. As part of the deal, Innovo issued JD a stake in the company. Joe's Jeans received approval from shareholders in October 2007 for the merger and a name change to Joe's Jeans.
The company's stock, which trades on Nasdaq, closed at 67 cents Friday, down 1 cent from the Thursday closing price.
Joe's Jeans president and CEO Marc Crossman and CFO Hamish Sandhu couldn't be reached for comment Friday.
— Richard Collings contributed to this report.