Tupperware’s bonds plummeted this week after the company’s disclosure of weak preliminary earnings and an accounting issue, raising questions about its ability to refinance a USD 600m bond that comes due in June 2021, said two sources following the situation. A four-notch downgrade late yesterday by Standard & Poor’s was icing on the cake and, so far, there’s been little support from high-yield investors willing to step into the name, as investment-grade holders flee.
The crossover-rated USD 600m 4.75% senior notes moved steadily down this morning and last traded at 86.75 yielding 16.957%, down from at 90.5 and a 13.17% yield yesterday before the downgrade. As recently as Monday (24 February), the bonds changed hands at 98 yielding 6.415%, according to MarketAxess.
Tupperware has Baa3/B corporate ratings after S&P first cut the borrower into high yield this past August with a downgrade to BB+, and then slashed it by an eye-watering four notches last night. Moody’s has had the issuer’s Baa3 rating on review for a possible downgrade since 26 November.
After the August S&P downgrade, the bonds initially shed about 2.5 points to changed hands at 99.85 yielding 4.835%, from 102.4 yielding 3.124%.
But Tuesday’s news finally catalyzed investor unease with the legacy “Tupperware party”-driven business model and mounting refinancing risks. The preliminary earnings disclosure outlined a 12%-14% revenue decline in 2019 and guided for similar erosion in 2020.
The earnings were largely in line with investor expectations, although, more worrisome, Tupperware said it is investigating accounting practices at its Fuller Mexico subsidiary and that USD 9m-USD 11m of the segment’s profits could be affected. The total full-year impact to profit on an adjusted basis is expected to be USD 19m-USD 21m, the company said.
With the bonds currently yielding in the high teens, the company is effectively priced out of the unsecured market to refinance the 2021 notes. The discount could be tempting to some, and if high yield or even distressed investors step in, then the yield could eventually narrow to a more palatable level in the high single-digits – though still far wide of the company’s current 4.75% cost of capital, one of the sources said.
But the possible outcomes are somewhat binary, as momentum continues to head downward. The longer it takes for investors to scoop up the bonds, the more fraught Tupperware’s refinancing prospects become, one of the sources said.
“People are puking this name out after the downgrade. It’s changing hands very quickly,” one of the sources said. “This could be a loan-to-own situation if they don’t deal with these maturities.”
In its ratings note yesterday, S&P said it could downgrade the company further into the CCC category if the company has no clear refinancing plans by the time the notes become current in June.
As an alternative to attempting an unsecured refinancing, Tupperware could pursue a secured deal, one of the sources noted. Meanwhile, the prospects for raising capital via equity issuance have dimmed, as Tupperware’s stock has lost 76% of its value since last August. The stock trades this morning at USD 3.26 per share and a USD 161.685m market cap, up 1.24% since yesterday’s close.
Tupperware still relies heavily on a “direct selling” model that depends on its ability to recruit and retain representatives around the world, said Moody’s in a 15 March 2019 Credit Opinion. The company says it has three million sales force members worldwide, and also sells through Amazon and its own online platform.
The company generated USD 204m of LTM free cash flow as of last September, based on USD 292m of EBITDA, USD 44m of capex and USD 44m of interest expense.
As of 28 September, liquidity totaled USD 528m, including USD 122m of cash, USD 325m of availability under a committed secured agreement and USD 81m of availability under uncommitted credit lines.
The company said in the Tuesday disclosure that, due to expectations it would violate a 3.75x leverage covenant in its credit facility this year, it has received approval, pending final documentation, from the banks to amend the covenant. In exchange, the company will provide additional collateral and subsidiary guarantees.
Tupperware’s leverage currently stands at 3.2x, based on the covenant definition, one of the sources said.
A representative for Tupperware didn’t respond to a request for comment.