Guess? Inc. is known for its sexy ads, which, over the years, featured models like Naomi Campbell and Claudia Schiffer.
Earlier this year, the Los Angeles-based apparel company, which generally pursues trendy twentysomethings, showed it could be just as seductive when targeting the capital markets.
Making its asset-backed securities debut, Guess shopped a $75 million deal sexy enough for rating-agency analysts to tout it as a model for the future. The future-flow transaction, backed by royalty payments from 14 licensing agreements, earned a BBB' rating from Standard & Poor's. Notably, that rating is several notches above the Guess corporate rating, which is BB-'.
Carlos Alberini, president and COO of Guess, said the company could include more of its licensing agreements in the future, if the deal ever needs bolstering. But, he said, so far it has been performing even better than originally anticipated.
Overall, Guess has about 21 domestic and international trademark licenses. The company grants the licenses to other companies that manufacture and distribute Guess-branded apparel and fashion accessories such as watches, shoes, handbags and eyewear.
Guess executives struggled with the idea of securitization at first, feeling reluctant to part with the assets. "We value our trademarks as much as our people," Alberini said. "It was a very difficult thing for us to go forward with."
But the company needed to refinance existing debt and, in the end, securitization proved to be the most attractive option.
"We decided to pursue that deal because we had a royalty stream that was very predictable - between $35 and $40 million a year for the previous five years," Alberini said, as he presented a case study of the transaction at a recent S&P conference.
Other Guess strengths he cited include: 21 years of history in the apparel business, high brand recognition, growth potential and an attractive consumer target (style-conscious shoppers ages 15 to 29).
Guess expects new locations to foster some of its growth. The company operates 260 stores in the U.S. and Canada, while many competitors have 500 stores in the U.S. alone, Alberini said.
JPMorgan Securities served as underwriter for the securitization, which has a legal final maturity in June 2011. Guess itself is the servicer, with Jassin-O'Rourke Group, an independent fashion and retail consulting firm, as backup manager and servicer.
S&P analyst Winston Chang described the deal as interesting, saying it is an example of how the intellectual property sector is evolving.
"It is a transaction based on future flow off a pool of contracts. That makes it unique in and of itself, I think," he said. "There's also the involvement of the intellectual property aspect because the licensing agreements are only as valuable as the Guess brand name at the end of the day. If the brand wasn't as strong, you'd have more issues."
Chang said confidence in both the legal structure and the backup servicer helped the transaction exceed the parent company's rating. He also cited the strength of the underlying contracts as a contributing factor.
Guess requires licensees to pay an annual trademark royalty - either a minimum fee or a percentage of net sales, whichever is higher. For the securitized licenses, the royalties - which are paid quarterly - range from 6% to 10% of net retail sales.
Historically, the royalty revenue has exceeded the minimum by a significant amount - a big positive for the deal, Chang said.
Sabine Zerarka, an attorney with S&P, said that if Guess went bankrupt, the brand would survive and continue generating license fees. "The idea here was that noteholders wouldn't rely on the liquidation value, but on the continuing operation of the assets," she said.
The licensing of trademarks back to Guess enable the continuation of non-license business, even in bankruptcy.
The credit support for the deal includes overcollateralization and an interest reserve account, which initially holds at least six months of interest, but builds to 12 months of interest with the capture of excess cash flow. There was no subordination.
Obligor default is among the key risks, but Chang said the deal could survive a stress scenario where the two largest licensees default.
Contract termination is another risk, as all of the underlying licenses have varying terms. The agreements in the pool were originally entered into between 1984 and 2001, most with an initial term between 3 and 10 years. The optional renewal terms range up to 10 years. Although licenses generally have been renewed in the past, Chang said the deal also passed a stress test that measured the cash flow without renewals.
"It held up very well, with all the different elements that supported this deal," Chang said. "I think it sets the standard for future intellectual property deals."