Bon-Ton Stores evaluates options for remaining 10¼% notes due 2014

By Paul Deckelman

New York, Aug. 17 - Bon-Ton Stores Inc. said the recent exchange offer that got rid of most of its 10¼% notes due 2014, replacing them with bonds maturing in 2017, enhanced its financial position, and although it has enough liquidity to immediately redeem the remaining 2014s, such a step would not be a "prudent" use of its borrowing capacity. The York, Pa.-based department store chain operator will instead evaluate its alternatives over the coming months.

The remaining $134 million of those notes come due on March 15, 2014. Bon-Ton's chief financial officer and executive vice president for finance, Keith E. Plowman, acknowledged to analysts on the conference call Thursday following the release of its results for the second quarter of fiscal 2012 that "certainly we know we need to address those by January of 2014. Whether it will be open-market buys, whether we'll go out and call some [or] whether we will issue new notes somewhere down the road, there's a lot of opportunities for us."

He said that having done the exchange, "we think that we're well positioned compared to a year ago. We're pleased with where we are."

One-for-one swap

Bon-Ton announced in early June that its wholly owned Bon-Ton Department Stores, Inc. subsidiary would offer newly issued 10 5/8% second-lien senior secured notes due 2017 to holders of the $464 million of 10¼% notes that remained outstanding out of the $510 million it originally sold back in 2006. The bonds would be swapped straight-up on a one-for-one basis. By the time the exchange offer ended in early July, about $330 million of the old bonds, or about 71% of the total outstanding, had been exchanged for the new debt.

Plowman said on the conference call that at the end of the fiscal second quarter on July 28, the company had excess borrowing capacity of about $382 million under its revolving credit facility, which provides for up to $625 million of borrowings, although that theoretical figure is limited by amounts actually available under a borrowing base calculation.

In answer to an analyst's query during the question-and-answer portion of the proceedings following his formal presentation and that of Bon-Ton's president and chief executive officer, Brendan L. Hoffman, the CFO said that kind of availability gives the company "the capability to take [the remaining 10¼% notes] out today, if we so chose."

He added, though, that such a decision would not be made on the basis of worrying about whether the remaining bonds' classification would be changed from "long-term" to "current" debt in early 2013, a year ahead of the scheduled maturity.

"We don't think that's the prudent thing to do," he declared, adding that the 2014 bonds constitute only "a very small amount" of the company's total debt of $905.6 million, "so I'm not going to let something like 'current versus long-term' dictate what I think is prudent for the company as far as an optimal capital structure."

That capital structure included the $134 million of the remaining outstanding 2014 notes, the $330 million of newly issued 10 5/8% secured 2017 notes and $153 million of outstanding revolver borrowings. There was also $228 million outstanding under a commercial mortgage-backed security facility and $61 million of mortgage notes and capital leases.

Credit-card deal plays a role

Plowman said that the $905.6 million total debt figure was about a 4% reduction from the company's year-earlier debt load.

During that time, Bon-Ton improved its debt picture by using the proceeds from its sale earlier this year of its private-label credit card portfolio to pay down the revolver. Bon-Ton announced in December 2011 that it had entered into a long-term agreement under which Alliance Data Systems Corp. - which provides private-label credit card services to a number of retailers - would take over management of Bon-Ton's credit-card program from HSBC Bank.

In June, the two companies announced the actual sale of Bon-Ton's portfolio of accounts to Alliance, giving the Dallas-based company full control over the retailer's estimated $475 million of card assets.

The financial terms of the latter transaction were not announced at the time. On the conference call, an analyst estimated the proceeds at $50 million and asked Plowman whether Bon-Ton had used it to pay down revolver debt, which the CFO confirmed.

An analyst asked Plowman to explain the thinking behind using the $50 million to pay down the revolver rather than to take out some of the remaining 2014 bonds. The executive said that the company had tapped its borrowing capacity for a number of different expenses, including using $27 million to buy back $46 million principal amount of the bonds at a discount in November 2011 and again in January 2012, and had made some prepayments of interest as well as fully funding this year's obligations under its pension plan. "All of that added up is over $50 million, so we thought it was prudent to take care of those items" and then replenish the revolver capacity, he said.

With the $50 million added back, the excess borrowing capacity is running only about $4 million below year-ago levels, which he said "compares favorably with the prior year when you take into account the $46 million reduction in our outstanding senior notes."

He said that the company was in compliance with the excess-capacity and fixed-charge ratio covenants under its credit facility: "There [are] no issues with either one. The company is sitting fine within the requirements."

Interest costs down

Net interest expense decreased by $2.1 million during the fiscal second quarter to $20.7 million from $22.8 million in the prior-year period, primarily reflecting reduced borrowings and interest rates.

Plowman told an analyst that interest expense for the remainder of the year will likely remain "essentially about what it was in the spring season. I don't see a whole lot of changes. We don't have anything anticipated there as far as changing our debt structure at this point."

While the capital structure seemed to be in decent shape during the quarter, Bon-Ton continued to have operational problems.

Comparable-store sales were up just 0.1% on a year-over-year basis, while total sales were down 0.1%. Operating margins and EBITDA fell, the operating loss increased, and the company's net loss widened out to $45 million, or $2.43 per diluted share, from year-earlier red ink of $32.3 million, or $1.78 per share.

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