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Creative Leisure News
306 Parker Circle
Lawrence, KS 66049
Phone: 785-760-5071
Email: mike@clnonline.com


 


A view of the industry through the eyes of a chain buyer.

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Why Michaels Didn't Make a Bottom-Line Profit

Evidence that the banking system is coming back.

by Staff Report (December 6, 2010)

The company's third-quarter sales and margins were up and costs were controlled, so why did the company post a net loss of $12 million for the quarter? CLN asked a banker friend who explained it this way:

Michaels refinanced $750 million of debt that had an interest rate of 10.0% and matured in 2014. In order to do this, they had to pay a premium to the bond holders as provided in the original loan agreement. This premium was about $41 million. Plus, Michaels had unamortized cost related to issuing the old bonds of $12 million that had to be written off, for a total of $53 million.

The new bonds have a rate of 7.75% and mature in 2018, so the advantages of refinancing are longer terms and a lower interest rate which will save about $17 million per year, making the payback period about three years.

What this does is put $53 million in expenses today, and pay it back over the next three years, which is when the original note was due. The real reason to do this is that it will make future years income look better and more importantly, it removes many restrictions that were placed on the company by the original bonds. 

Also important is that it pushes back the maturity date to 2018. You may remember that at the beginning of 2009, the banking system was in crisis and it looked like Michaels would not be able to refinance the large amount of debt that was due in 2011.

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