China Tariffs' Impact on Arts and Crafts Retailer Michaels Worries Investors

Michaels Stores Inc.'s plan to sell $500 million of high-yield bonds to refinance already existing debt is starting to look like the latest casualty in the U.S. trade war with China.Credit investors are worried Michaels may be hurt by tariffs the U.S. is set to impose on Chinese imports, along with disappointing financial results from earlier this month. And that has them asking for better terms.Yields were boosted to about 8 percent on Friday. That is higher than the original price discussions of around 7% when the deal was first marketed to investors earlier this week, according to people familiar with the matter who aren't authorized to speak publicly.Some investor protections -- such as restrictions on dividend payments and asset sales -- were also strengthened, the people said.Tariff concerns are another headwind in an already challenged retail sector. That's weighing on Michaels, which had weathered those problems better than others, and was able to lower pricing on its term loan in May 2018."High-yield retail is just a difficult place to raise money at present, particularly for companies with little organic growth and margin compression," said Noel Hebert, a Bloomberg Intelligence analyst. "The momentum of the business is rolling over and the potential implications of tariffs on Chinese imports make this business not the best place to be in."Company executives said during their first-quarter earnings conference call they are trying to offset the potential impact of tariffs by moving production outside of China. The company also cut their adjusted earnings per share forecast for the year, and said comparable store sales may decline again for a third straight quarter.This week the company saw the price for its first-lien loan due in 2023 fall to an all-time low bid of 95.875, according to data compiled by Bloomberg.To be sure, this isn't the only deal to have struggled in the high-yield market this week as investors have become pickierAn 8% yield on the new Michaels bond, rated B1 by Moody's Investors Service and B by S&P, will increase the company's interest costs as proceeds will refinance an existing bond maturing next year that pays lower interest of 5.875%. The yield is also significantly higher than the average Single B rated bond, which yields 5.75%, according to Bloomberg Barclays index data.Lisa Lee and Gowri Gurumurthy, Bloomberg  Continue reading...

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