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