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Related Issuers
Rating Action:

Moody's Downgrades Charlotte Russe's CFR and Term Loan Ratings to B3; Outlook Changed to Negative

25 Jan 2016

Approximately $230 million of debt affected

New York, January 25, 2016 -- Moody's Investors Service ("Moody's") downgraded Charlotte Russe, Inc.'s ("Charlotte Russe") Corporate Family Rating ("CFR") and senior secured term loans due 2019 to B3 from B2. The Probability of Default Rating was also downgraded by one notch to B3-PD and the outlook was changed to Negative.

The downgrade reflects weak YTD operating performance through October 31, 2015 and Moody's expectation that Charlotte Russe will be challenged to improve its operating performance sufficiently to bring credit metrics back in line with the B2 rating category over the next 12-24 months. Over the YTD period Charlotte Russe has seen same store sales decline close to 10% caused by declining mall traffic trends and product acceptance issues. In addition, higher markdown rates to clear inventory and support promotional activity, as well as the impact from fixed costs, have pushed EBITDA margins significantly lower. According to Moody's analyst Dan Altieri, "given the competitive operating environment and declining mall traffic trends, it will take some time for the company to reestablish itself with its core customers."

Moody's estimates lease adjusted leverage for the LTM period to be in the mid 5 times range, however leverage for funded debt is closer to the high 7 times range. In addition, interest coverage metrics (EBIT/Interest and EBITA/Interest) have deteriorated to below 1 time for the LTM period, which is well below the downgrade trigger of 1.25 times stated in our August 2015 credit opinion. The negative outlook reflects Moody's expectation that a challenging operating environment will continue to pressure results over the next 12-24 months and that any improvement in operating performance will be gradual. The outlook could be stabilized if Charlotte Russe is able to improve operating performance and sustain interest coverage (Moody's adjusted EBIT/Interest) above 1 time.

Moody's took the following rating actions today:

..Issuer: Charlotte Russe, Inc.

.Corporate Family Rating, Downgraded to B3 from B2

.Probability of Default Rating, Downgraded to B3-PD from B2-PD

.$150 million Senior Secured Term Loan due 2019, Downgraded to B3 (LGD-3) from B2 (LGD-3)

.$80 million Senior Secured Term Loan due 2019, Downgraded to B3 (LGD-3) from B2 (LGD-3)

.Outlook, Changed to Negative

RATINGS RATIONALE

Charlotte Russe's B3 CFR reflects the company's high leverage and weak interest coverage resulting from weak YTD operating performance and a history of aggressive financial policies. The rating also reflects Moody's expectation that a challenging operating environment, including declining mall traffic trends and competitive pressures, will continue to be a headwind against a meaningful recovery. As a result, Moody's anticipates credit metrics will remain weak over the next 12-24 months. Other challenges include the company's low operating margins and event risk under private equity ownership. Moody's also believes that the company's fast fashion business model can heighten the impact from supply chain disruptions, such as the west coast port slowdown, which partially contributed to Charlotte Russe's weak performance in the first quarter of 2015.

The ratings benefit from a history of solid operating performance under the current management team from fiscal 2011 through fiscal 2014, highlighted by same store sales growth and margin improvement over the period, as well as the development of an omni-channel model, with a growing eCommerce and mobile business. The company's adequate liquidity profile also supports the rating.

Moody's anticipates Charlotte Russe will maintain adequate liquidity over the next 12-18 months with close to breakeven free cash flow (CFO -- Capex) and cash maintained near the $6 million level on the balance sheet as of October 31, 2015. Although LTM free cash flow was negative, Moody's expects future cash flow will benefit from meaningfully reduced capital spending and more normalized working capital trends, as the company works to clear its excess inventory. Charlotte Russe has access to a $75 million asset-based revolving credit facility (ABL) due 2018 which had about $5 million drawn at the end of the third quarter. Moody's expects that the outstanding balance will be repaid by the end of fiscal 2015 and anticipates modest reliance on the facility over the next 12-18 months during peak seasonal periods. Due to an $11 million excess cash flow payment made during Q1 2015, there are no required quarterly amortization payments until the loans comes due in 2019.

The company's credit agreements contain only a springing fixed charge coverage test on the ABL facility that is triggered if availability falls below the greater of $6.0 million or 10% of available borrowings. Moody's does not expect the company will trigger the covenant. However, if tested, Moody's forecasts minimal to no cushion on the covenant over the next 12-18 months. Alternative liquidity is limited because of the fast-moving inventory and absence of meaningful real estate holdings.

The B3 rating assigned to the company's senior secured term loans is in line with the CFR since these loans represent a preponderance of funded debt. The term loans mature in May 2019 and have a 2nd lien position on the company's accounts receivable and inventory (ranking junior to the $75 million asset-based revolver) and a first lien on substantially all other assets of the borrower. Charlotte Russe leases substantially all of its locations, therefore the company does not have meaningful real estate holdings.

Ratings could be upgraded if Charlotte Russe is able to reverse recent operating trends, driving same store sales growth and improving EBITDA margins, such that Debt/EBITDA is sustained below 6.0 times with interest coverage (EBIT/Interest) above 1.25 times. Given the company's history of aggressive financial policies, an upgrade would also require a willingness to maintain metrics at these levels.

Ratings could be downgraded if operating performance fails to meaningfully improve, resulting in EBIT/Interest sustained below 1.0 time, or any deterioration in liquidity.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in San Francisco, CA, Charlotte Russe, Inc. is a retailer of value-oriented `fast fashion' apparel and accessories, targeting 18-24 year old women. As of October 31, 2015, the company operated 559 retail stores in the US and Puerto Rico and generated sales through its ecommerce and mobile platforms. Revenue for the LTM period was $935 million. The company is owned by affiliates of Advent International and current management.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniel Altieri
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades Charlotte Russe's CFR and Term Loan Ratings to B3; Outlook Changed to Negative
No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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