Chanel Raises €700 Million From High-Grade Private Debt Market

[Brooklynite]

This is curious given how much cash the business generates. Though they did talk about buying a property in NYC.

​

Chanel Raises €700 Million From High-Grade Private Debt Market​

• Luxury fashion house borrows from US private-placement market
• Deal follows similar transactions for Ferrero, Remy Cointreau

By Silas Brown
(Bloomberg) -- Chanel has raised over €700 million ($758 million) from a privately-placed bond sale, people with knowledge of the matter said.
The London-based luxury fashion house is the latest big European business to raise debt privately, following similar deals for German engineering firm Robert Bosch Gmbh, Italian chocolatier Ferrero and French drinks maker Remy Cointreau.
These so-called US private placements are a form of private debt that allow blue-chip firms to directly tap institutional investors such as insurers. That enables borrowers to bypass volatility in public credit markets.
Read more: High-Grade Private Debt Thrives as More Big Deals Come to Market
The move by Chanel comes after it cautioned that conditions in the luxury industry are growing more challenging, following double-digit growth in its sales and profit last year. Chanel Ltd. sales climbed 16% on a comparable basis to $19.7 billion in 2023, while operating profit rose 11% to $6.4 billion, it said in May.
Goldman Sachs Group Inc. and Societe Generale SA arranged the debt for Chanel, said the people, who requested anonymity when discussing private matters. The notes mature in 10 and 12 years.

Source: bloomberg

 

[gracekelly]

So what are they positioning to purchase? A company? Open more boutiques?

I am of the opinion that Chanel will follow the lead of Hermes and Dior and open a boutique at the Topanga Mall in Woodland Hills. There is a new wing that was built to house the luxury brands. They could pull the Chanel from Nordstrom if they do this. They had already pulled clothing and bags from Neiman Marcus across the mall, and more recently, the shoes.

 

[880]

Private debt (one type is private, non bank) credit) is emerging as a popular asset class. It is growing in popularity bc of pricing certainty and speed as well as steady and higher returns on investment. It is used to provide working capital, or fund infrastructure, or real estate development for business growth. (So, it could be to fund a purchase or simply to fuel business growth)

Other institutions invest by making private (non bank) loans. Investors also have less risk in case of default on the loan. Default is less likely when the economy is good; Chanel seems to be banking on no recession any time soon.

Institutional investors with a fixed-income allocation are the ones that consider this as an alternative asset via funds (similar in some ways to private equity or VC. But, investors who make these loans do so with the idea of carrying the loan to fruition, so this is not as liquid. Bc it’s private, not public, presumably it is also less transparent.

This is my very basic, layman understanding of private debt, so of course I would welcome correction from more knowledgeable members here

ETA: I have no idea how long these deals take to work through. I’m not in finance. But, it seems like private debt might have been even more attractive post banking crisis last year.

 

[Grande Latte]

Private debt (one type is private, non bank) credit) is emerging as a popular asset class. It is growing in popularity bc of pricing certainty and speed as well as steady and higher returns on investment. It is used to provide working capital, or fund infrastructure, or real estate development for business growth. (So, it could be to fund a purchase or simply to fuel business growth)

Other institutions invest by making private (non bank) loans. Investors also have less risk in case of default on the loan. Default is less likely when the economy is good; Chanel seems to be banking on no recession any time soon.

Institutional investors with a fixed-income allocation are the ones that consider this as an alternative asset via funds (similar in some ways to private equity or VC. But, investors who make these loans do so with the idea of carrying the loan to fruition, so this is not as liquid. Bc it’s private, not public, presumably it is also less transparent.

This is my very basic, layman understanding of private debt, so of course I would welcome correction from more knowledgeable members here

ETA: I have no idea how long these deals take to work through. I’m not in finance. But, it seems like private debt might have been even more attractive post banking crisis last year.

I used to be in finance, but I'm not familiar with private debt. Personally, I would not invest in private debt due to its lack of liquidity, transparency, and my own uncertainty about holding it until maturity.

And seriously, a note that matures in 10-12 years is TOO long. Just buy a bag!

 

[880]

I used to be in finance, but I'm not familiar with private debt. Personally, I would not invest in private debt due to its lack of liquidity, transparency, and my own uncertainty about holding it until maturity.

And seriously, a note that matures in 10-12 years is TOO long. Just buy a bag!

It’s interesting re illiquidity from the point of investment. Holding illiquid private equity (assuming private debt is like PE) could be a balanced part of a portfolio. Of course, one should be guided by what your financial person thinks, not TPF lol.

Does the fact that chanel may be making savvy financial decisions impact my actions as a consumer? I buy RTW these days, and I intensely dislike change. Unlike many others, I found that some VV designs, carefully picked, were very wearable. I also assumed that VV was constrained by the powers that be to make her collections more commercially successful. And, in that, she succeeded. Since VV has left, I find this article an indication that chanel seems to otherwise have its house in order.

Of course, solid financial planning of a fashion house won’t cause me to open my wallet if I don’t love that seasons merchandise. But, just like I take comfort in Hermes leather holding value, (even though I buy Hermes leather bc I love the product), these types of business decisions may give me comfort that Chanel will eventually get the artistic side right, at least until chanel proves otherwise lol

 

[Ghettoe]

Private debt (one type is private, non bank) credit) is emerging as a popular asset class. It is growing in popularity bc of pricing certainty and speed as well as steady and higher returns on investment. It is used to provide working capital, or fund infrastructure, or real estate development for business growth. (So, it could be to fund a purchase or simply to fuel business growth)

Other institutions invest by making private (non bank) loans. Investors also have less risk in case of default on the loan. Default is less likely when the economy is good; Chanel seems to be banking on no recession any time soon.

Institutional investors with a fixed-income allocation are the ones that consider this as an alternative asset via funds (similar in some ways to private equity or VC. But, investors who make these loans do so with the idea of carrying the loan to fruition, so this is not as liquid. Bc it’s private, not public, presumably it is also less transparent.

This is my very basic, layman understanding of private debt, so of course I would welcome correction from more knowledgeable members here

ETA: I have no idea how long these deals take to work through. I’m not in finance. But, it seems like private debt might have been even more attractive post banking crisis last year.

I work in finance where we are loosing clients to private lending. I can't speak to the industry as a whole as I'm not aware but on our side, less regulation, less requirements, and not having to chase funding is attractive for private debt. On the public side, if you get a bad rating, it becomes not only harder to get funding, but it also becomes harder to get funding at attractive rates. Market volatility is also a consideration. Many institutional investors hold debt based on ratings.

To give a simple example. Let's say you decide you want to invest in the government debt of different countries, but you only want countries rated above BBB. So you pick ten countries and buy their bonds. Now let's imagine a pandemic happens, there are lockdowns and some of the countries you've invested in face economic issues and struggle to service their debt. 5 out of the 10 countries you hold get downgraded. Now you have to sell five positions in your portfolio. Now assume hundreds of people are doing the same. The problem is the governments that are struggling now want funding to be able to get through that downturn, but public markets don't want to lend because they worry that these governments won't be able to service their debt.

The real life equivalent of this is your credit score. The better your credit score, the easier it is to get a loan at a favorable rate, but what if you only have a 600 credit score because you made silly decisions when you were young but now you're more financially prudent? You decide to approach your wealthy uncle Jim to loan you the money so you bypass the approval process for the banks, the higher rates, and the more stringent requirement. Uncle Jim believes in you so he doesn't care about your credit score. This is where the attractiveness of the private side comes in. The downside of the public side is there's not a lot of in between. You can have a 600 credit score because five years ago you were horrible with money but you've spent the last four years being frugal, paying off debt slowly and really tightening the belt. The bank doesn't see that, they see a 600 credit score.

 

[880]

@Ghettoe, can you please explain the interest rates of private debt like this; the role of interest rates and inflation in that interest rate (or lack thereof); and, the circumstances /rationale a company like Chanel would choose to use this to fuel business growth? Thank you

ETA: also if you could explain how this differs from private equity (of course the bond format versus of course equity, but in what other ways too pls) thank you!

 

[Ghettoe]

@Ghettoe, can you please explain the interest rates of private debt like this; the role of interest rates and inflation in that interest rate (or lack thereof); and, the circumstances /rationale a company like Chanel would choose to use this to fuel business growth? Thank you

ETA: also if you could explain how this differs from private equity (of course the bond format versus of course equity, but in what other ways too pls) thank you!

Private equity is a little different in that they buy out companies as a whole (equity in a company). The PE firms often use the debt market to raise enough capital to buy out firms. In my firm, we refer to these companies as PE owned. Their goal is hold the company for a certain time period (often about 5 years) and then go public or sell to another PE firm. Their best interest is that the company actually grows and generates profit. The debt is collateralized by the company's assets. Sometimes, the PE firm will put in money for additional liquidity, but rarely. Often, the PE firm will also come in for a rating because they too need access to debt markets. This basically means the PE firm doesn't have to use their own capital. They can use leverage to own many different companies.

For PE firms because they take on debt to buy out these companies, they are often doing so at a premium in the hopes that these companies grow. The problem here is that sometimes the enterprise value of the company is much lower than what they paid. So say you issued debt to buy a company for 1 billion and five years pass but the company doesn't grow as planned and they are only worth 700 million. The PE firm wants to sell but that would be at a 300 million loss. This is also where problems arise because debt terms tend to be five years, and a refinancing is needed to extend these terms. So if rates are high, you're refinancing 1 billion of debt at higher rates for a company that's only worth $700 million. If you can get the debt from private lenders, you may go that route. We have a lot of companies right now struggling to refinance because COVID knocked their growth trajectory and they initially got debt in 2020 when rates were incredibly favorable. The fed raised rates to fight inflation so now these companies have to refinance debt they got at about 3% with new debt at 7%. So 30 million of interest with higher rates becomes 70 million. I've had companies where that's now 100 million more in interest expense. If you're a private lender, that's more interest coming to you.

The private lenders don't own the companies. They do not have equity in the company. They make money from interest rates and they don't necessarily provide a better interest rate than banks either but public debt markets are subject to more stringent standards, and also market volatility. A lot of banks are also very regulated post 2008 recession.

Private debt is often less risky because debt has a higher priority of claim than equity. In the case of bankruptcy, they are paid first. PE firms pretty much lose a substantial amount with bankruptcy.

 

[Ghettoe]

To answer the Chanel question, they might choose so because of a number of factors. The lack of market volatility, guaranteed funding, less time to get the funding, no negotiations or regulations tied with said funding, etc.

To go back to my wealthy uncle Jim example. You want to buy a car with your 600 credit score. You go to bank of America, they tell you that you have to put $2,000 down, make a mandatory payment of $500 monthly, and they initially quot you a 5% rate, but when you go to buy the car maybe a week later, you redo the quote and they will lend to you at 7%. You will also have to submit paper work, it will take a week and only then can you buy a car. Well, wealthy uncle jim says, you know what, sign this contract today to pay me $700 monthly. Tomorrow, you'll have your car.

 

[880]

@Ghettoe , thank you so much for the post above
I am planning to reread it a few times bc I’m new to this.

the company doesn't grow as planned and they are only worth 700 million.

Is there a formula for retail company valuations? X times earnings? X times profit?
For a private company like Chanel, are they subject got the same kind of valuation as a public one?

Re interest rates, is there a way to lock in the Covid or lower interest rates? High net worth individuals can do this
for credit lines, subject to certain conditions, so shouldn’t a wealthy company like Chanel be able to do so?
Is the fact that Chanel is ‘high grade’ helpful in securing more favorable terms?

debt has a higher priority of claim than equity.

This makes sense to me.

Thank you again!

 

[Ghettoe]

@Ghettoe , thank you so much for the post above
I am planning to reread it a few times bc I’m new to this.



Is there a formula for retail company valuations? X times earnings? X times profit?
For a private company like Chanel, are they subject got the same kind of valuation as a public one?

Re interest rates, is there a way to lock in the Covid or lower interest rates? High net worth individuals can do this
for credit lines, subject to certain conditions, so shouldn’t a wealthy company like Chanel be able to do so?
Is the fact that Chanel is ‘high grade’ helpful in securing more favorable terms?



This makes sense to me.

Thank you again!

Since I just did the CFA level 2. The basic theoretic formula is Enterprise Value = debt + equity (market cap) - cash and cash equivalents.
For companies that are not publicly traded so there are no market cap numbers, the simplest way we do it is to take the purchase price the PE firm paid or the VC (venture capital) paid. I believe some companies may also use comparable companies or transactions to determine this. I am assuming there are other factors but unfortunately, I do not work for a PE firm so it's hard to know what valuation methods they may use when they determine what to pay. After all, many companies also make acquisitions, or even branch out to other products.

A lot of debt is often floating and companies can get fixed debt but you run the risk of interest rates getting even lower and now you're stuck with a premium. One way companies offset higher rates is through hedges. So they will enter into an interest rate swap that will allow them to hedge their debt against rising rates. The swap basically pays out a certain amount that allows you to offset the higher interest expense.

I'm trying to dig through cap IQ (my company's system) to see if they have a public rating. With that said, higher rated companies do get debt at more favorable terms. Chanel tends to be very closed off so it's always hard to get information on them. I seem to recall they weren't rated.

 

[880]

Since I just did the CFA level 2. The basic theoretic formula is Enterprise Value = debt + equity (market cap) - cash and cash equivalents.
For companies that are not publicly traded so there are no market cap numbers, the simplest way we do it is to take the purchase price the PE firm paid or the VC (venture capital) paid. I believe some companies may also use comparable companies or transactions to determine this. I am assuming there are other factors but unfortunately, I do not work for a PE firm so it's hard to know what valuation methods they may use when they determine what to pay. After all, many companies also make acquisitions, or even branch out to other products.

A lot of debt is often floating and companies can get fixed debt but you run the risk of interest rates getting even lower and now you're stuck with a premium. One way companies offset higher rates is through hedges. So they will enter into an interest rate swap that will allow them to hedge their debt against rising rates. The swap basically pays out a certain amount that allows you to offset the higher interest expense.

I'm trying to dig through cap IQ (my company's system) to see if they have a public rating. With that said, higher rated companies do get debt at more favorable terms. Chanel tends to be very closed off so it's always hard to get information on them. I seem to recall they weren't rated.

Thank you so much for taking the time to answer my post.

And congratulations on CFA Level 2! What a wonderful accomplishment.
You and your family must be so proud! I am so happy for you
(The emoticon bar isn’t working for me right now or I would add some)

 

[zaraha]

Private equity is a little different in that they buy out companies as a whole (equity in a company). The PE firms often use the debt market to raise enough capital to buy out firms. In my firm, we refer to these companies as PE owned. Their goal is hold the company for a certain time period (often about 5 years) and then go public or sell to another PE firm. Their best interest is that the company actually grows and generates profit. The debt is collateralized by the company's assets. Sometimes, the PE firm will put in money for additional liquidity, but rarely. Often, the PE firm will also come in for a rating because they too need access to debt markets. This basically means the PE firm doesn't have to use their own capital. They can use leverage to own many different companies.

For PE firms because they take on debt to buy out these companies, they are often doing so at a premium in the hopes that these companies grow. The problem here is that sometimes the enterprise value of the company is much lower than what they paid. So say you issued debt to buy a company for 1 billion and five years pass but the company doesn't grow as planned and they are only worth 700 million. The PE firm wants to sell but that would be at a 300 million loss. This is also where problems arise because debt terms tend to be five years, and a refinancing is needed to extend these terms. So if rates are high, you're refinancing 1 billion of debt at higher rates for a company that's only worth $700 million. If you can get the debt from private lenders, you may go that route. We have a lot of companies right now struggling to refinance because COVID knocked their growth trajectory and they initially got debt in 2020 when rates were incredibly favorable. The fed raised rates to fight inflation so now these companies have to refinance debt they got at about 3% with new debt at 7%. So 30 million of interest with higher rates becomes 70 million. I've had companies where that's now 100 million more in interest expense. If you're a private lender, that's more interest coming to you.

The private lenders don't own the companies. They do not have equity in the company. They make money from interest rates and they don't necessarily provide a better interest rate than banks either but public debt markets are subject to more stringent standards, and also market volatility. A lot of banks are also very regulated post 2008 recession.

Private debt is often less risky because debt has a higher priority of claim than equity. In the case of bankruptcy, they are paid first. PE firms pretty much lose a substantial amount with bankruptcy.

Thank you for taking time to explain. I also wondered about those Venture Capitalist or PE firms, they reminds me of house flippers. Sort of like putting a lipstick on a pig and sell it, make money and move on to the next project. I guess one of the advantage is getting the funding you need more quickly, hassle free than traditional banking route. But wouldn’t chanel get better terms if they go traditional route. Anyway congratulations on passing your exam, it such a pleasure to read your money/career journey on the other tread.