Billabong mirage

Billabong’s stock surged 46% yesterday after it said two private equity firms were in advanced talks on refinancing and asset sales. Today the stock has retreated. At 1044 AEST Billabong shares were down 1.5 cents, or 7.9%, to 17.5 cents. It now seems clear yesterday’s move in the stock was an anomaly. The stock has lost more than 80% of its market value in the last 12 months as private equity firms including Altamont Capital Partners and Sycamore Partners have flip-flopped over whether to buy a once iconic surf brand that has lost its way. But the romance of sun, sea and surf has clearly not mesmerised Billabong’s latest suitors who perhaps see an opportunity to control the company through its debt rather than its equity.

Billabong has about $400 million of gross debt in a facility that expires in July 2014, according to UBS’ analyst Ben Gilbert. In addition to this the company has about $400 million of off-balance sheet lease commitments. Quite how all this will be restructured is unknown. HSBC’s decision to sell $US20 million of Billabong multicurrency debt to SC Lowy at a 20% discount to par value, according to Bloomberg News, suggests that distressed debt investors are circling.

Firms such as SC Lowy, Altamont and Sycamore are likely to impose higher costs on Billabong if they provide financing. Analysts such as Gilbert say Billabong may dispose of as much as $30 million worth of property and he expects the sale of West 49, a Canadian brand. More brand sales are undoubtedly in the works. Billabong, as far as one can tell, is not in any breach of its debt covenants. But it may be close. That will ratchet up the pressure on Billabong’s board to make decisions on a refinancing package before one is imposed on them.

Gilbert earlier this month cut his forecast for Billabong’s earnings before interest, tax, depreciation and amortisation for the 12 months to June 30 by 25% to $30 million and by 20% in 2014 to $40 million. Gilbert may have to cut his forecasts again. It is clear under any refinancing of Billabong’s debt just a few of the company’s brands, Nixon, Tigerlily, Palmer, Von Zipper, Honolua, Element and Custom, may remain. The company desperately needs cash. Billabong's stretched balance sheet lacks tangible asset backing. Watch out. The stock could slide.