(Reuters) – U.S. jewelry chain Tiffany & Co (TIF.N) said on Tuesday that it amended some of the terms of its debt to give it financial breathing space, as it seeks to ensure that its $16.2 billion sale to French luxury goods giant LVMH is completed.
FILE PHOTO: A Tiffany & Co logo is seen outside the store on 5th Ave in New York, New York, U.S., March 19, 2019. REUTERS/Carlo Allegri/File Photo
Here is a description of Tiffany’s debt covenants and why they matter to the LVMH deal.
WHAT ARE THE DEBT COVENANTS?
Tiffany has agreed with its creditors to comply with certain financial ratios. These ratios restrict how much debt Tiffany can carry and set a floor on the earnings power it needs to have to service its debt.
WHY ARE THE DEBT COVENANTS IMPORTANT FOR THE LVMH DEAL?
The COVID-19 pandemic resulted in a 45% drop in Tiffany’s global net sales in the three months to the end of April and is weighing on its finances.
Were Tiffany to breach the covenants, LVMH could use this as grounds under their agreement to call for a renegotiation of the terms of the acquisition, sources told Reuters last week.
While Tiffany is in compliance with covenants it had agreed to with its creditors, LVMH is closely monitoring Tiffany’s finances in the coming weeks to see if this remains the case.
WHAT CHANGES DID TIFFANY MAKE TO THE DEBT COVENANTS?
Tiffany said on Tuesday that it secured an increase in the maximum leverage ratio for much of its debt from 3.5 times its debt to cash flow to 4.5 times. It also clinched a reduction of the maximum fixed charge coverage ratio in some of its bonds from 2 times its earnings to interest and rent expenses to 1 times.
While Tiffany agreed to pay its creditors a small fee and higher interest during the covenant relief period, it said the changes were permitted under its merger agreement with LVMH.
WILL THE CHANGES TO THE COVENANTS SAFEGUARD THE DEAL WITH LVMH?
Tiffany said that based on its forecasts, the changes give it ample headroom to remain in compliance with the debt covenants.
The longer the deal with LVMH takes to close, however, the higher the risk that Tiffany breaches the new covenants were its financial situation to worsen more than it expects.
The deal is still pending regulatory approval from the European Union. If the transaction has not been completed by Aug. 24, Tiffany has the right to extent the merger agreement by three months.
Reporting by Joshua Franklin in New York; Editing by Nick Zieminski