Nordstrom Buyout Unlikely Due To High Interest Rates (Other (Not Listed) Sample)
Nordstrom buyout unlikely due to high interest rates By Josh KosmanOctober 2, 2017 | 10:42pm
The Nordstrom family has turned down the commitments from the biggest leveraged lenders because the interest rates were too high and terms too tough, two sources told The Post.With little chance of receiving much less expensive rates, a buyout of their company is not likely, the sources said.In recent days, banks like JPMorgan Chase asked the Nordstrom family for the flexibility to charge a 12 percent interest rate on the bonds they underwrite, one lender said.The high interest rate request is the result of how badly the two most recent sizable retail buyouts are struggling, sources said.“Financing and terms did not match initial indications,” a lending source said.The family behind the Seattle-based retailer — which in June announced it was exploring a possible buyout of the 69 percent of shares they do not own — has been trying to arrange about $7 billion in debt financing to close the deal.The Post wrote exclusively on Sunday that discussions to take the retailer private were now in danger of falling apart.Nordstrom’s shares on Monday fell 6.3 percent, to $44.18. The news about the tough lending market for retailers also dragged down Macy’s shares by 4.3 percent, to $20.89, JCPenney shares by 5.8 percent, to $3.59, and Sears by 3 percent, to $7.08.The high interest rate request on the bonds comes as the notes used to help finance PetSmart’s $8.25 billion 2015 buyout have dropped in recent weeks to below 80 cents on the dollar.Bonds issued by Fresh Market in 2016 to support of its $1.4 billion buyout are now trading in the low 60s.Besides, no less than Academy Sports, Bi-Lo Supermarkets, Charlotte Russe, Claire’s Stores, David’s Bridal, J. Crew, Neiman Marcus and Tom’s Shoes all have bonds trading at below 70 cents on the dollar, a debt trader said.“The whole sector is out of favor,” the lending source said.
IB ECONOMICS MACRO IA
Kosman (2017) Nordstrom first highlighted that the Nordstrom family sought to go private, but the terms of debt financing were unappealing to the family even as this was the likely way to raise billions to finance a buyout. The Nordstrom family were concerned that they were charged high interest rates and stringent conditions to leverage the retailer through bond issue. The capital structure affects the value of the firm became the interest payments are tax deductibles, but high repayment costs are unattractive to the borrowers. Discussions among the Nordstrom family to go private were unsuccessful as the decisions makers of the Seattle-based retailer were concerned about the long-term impact of debt financing.
Interest rate (%)
Quantity of funds demanded
Fig: When the interest rates are low the quantity of loanable funds demanded increases
JP Morgan Chase offered a 12% interest rate charge on bonds, and even as the rate charge was flexible it was high and no conducive for the retailer (Kosman, 2017). To acquire the 69% of Nordstrom
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