Huntington Beach-based Quiksilver Inc. could log another notch in its turnaround after a debt rating company said it may lift its rating on the clothing maker.
New York-based Moody’s Corp. said it could raise its rating on Quiksilver’s debt after a debt-for-stock swap plan detailed on Tuesday.
Quiksilver plans to issue stock to key investor New York-based Rhone Group LLC in exchange for forgiving up to $140 million in debt.
Moody’s now has a “B3” overall rating on Quiksilver. The rating is in the upper middle of non-investment grade or “junk” status.
The rating covers about $400 million in debt held by Quiksilver, which also has seen improvement in its business after the worst downturn in recent memory for clothing makers, Moody’s said.
Earlier this month, Quiksilver easily beat Wall Street expectations with results for its recently ended quarter.
Quiksilver reported an adjusted profit of $15.7 million for the three months through April, more than double its profit from a year earlier.
Wall Street analysts were expecting a solid quarter from Quiksilver. Even so, the company’s profit easily surpassed the $4.2 million in profit analysts had expected on average.
The company saw revenue of $468.3 million, down 5% from a year earlier but easily topping the $455 million expected by Wall Street.
Quiksilver is hoping to improve its profitability by eliminating part of its debt. The company paid $21 million in interest on its debt in the recently ended quarter.
It plans to exchange $75 million worth of secured term loan debt for 16.7 million shares with Rhone Group.
The company is exchanging the shares at a rate of $4.50 each, valuing the deal at $21.2 million.
Quiksilver’s shares now trade at about $4.80 on a market value of $620 million.
The company also has the option to offer more shares to Rhone in exchange for $65 million in additional debt on its secured term loans, which have a balance of about $160 million.
Quiksilver, the largest maker of clothes inspired by surfing, skateboarding and snowboarding, said it plans to seek financing to pay off the reminder of the loans.
The moves stand to make Rhone an even bigger investor in Quiksilver. The company owns warrants to buy 16% of Quiksilver and holds two seats on the company’s board.
If the debt-for-stock swaps go through, Rhone stands to own 30% of Quiksilver. The company said it plans to enter a pact with Rhone that would cap its ownership.
Last year, Quiksilver struck a deal with Rhone to borrow $150 million over five years to help the company refinance a U.S. line of credit and consolidate its European debt.
The deal was seen as a lifesaver for Quiksilver, which nearly was sunken by 2005’s $560 million ill-fated buy of French ski maker Rossignol.
Quiksilver ended up unloading money-losing Rossignol in a $50 million fire sale in 2008 but was left with about $1 billion in short- and long-term debt from the deal and borrowing to keep Rossignol afloat before the sale.
