The Long lsland, N.Y.-based company revealed in a filing late Thursday with the Securities and Exchange Commission that it has taken over a loan of $48.8 million owed by Betsey Johnson LLC to its original creditors, which include Babson Capital Australia and Paradox Lending.
The original intellectual property-collateralized loan of $50 million was made to Betsey Johnson on Aug. 20, 2007, by Paradox Capital, in support of Castanea Partners’ acquisition of a majority stake in the company’s apparel business on Aug. 23.
That loan is currently in default. Steven Madden Ltd. is assuming the outstanding principal for a price of $27.6 million, through a wholly owned subsidiary created for the purpose of the transaction. As at June 30, 2010, Madden had cash and cash equivalents of $42.8 million.
Analysts said the fact that the debt was purchased at a heavy discount implies the debt is not being serviced, and the equity value of the privately held company has been significantly reduced.
Madden said in the filing it has “commenced discussions with [Betsey Johnson] regarding the resolution of the debt.” When contacted late Thursday, the firm declined to comment.
Sterne Agee analyst Sam Poser called the move a “shrewd takeover and an opportunity for a nice payday.
“Based on the wording of the filing, we believe that [Madden] is attempting to take control of Betsey Johnson. We do not believe that [Madden] is in the lending business,” added Poser in a research note released Friday.
“If Madden takes over Betsey Johnson, the apparel business will likely become licensing revenue for Steve Madden, and the handbag, belt, small leather goods and umbrella businesses will be owned by Steve Madden,” he added. “Also, the Betsey Johnson footwear business, currently licensed by Titan Industries, will eventually be brought into the Steve Madden stable of brands.”
Steven Marotta, an analyst at CL King & Associates, told FN “it would stand to reason, considering Steve Madden’s strength in the young, women’s contemporary and soft-goods product categories, combined with the fact that they are not historically a bank, they have at least more than a passing interest investing in the brand.”
“It is not officially a right of first refusal should the brand later be sold, but it puts Madden in a stronger position to affect the ultimate destiny of the brand,” he added.
The loan is to be repaid in quarterly installments of varying amounts over the next three years, with a final installment on Aug. 20, 2012.
The loan bears an interest rate of either the LIBOR rate plus 5 percent, or 10 percent per annum, whichever is greater at the time when installments are due. The collateral for the loan includes the company’s intellectual property, as well as “the borrower’s personal property, accounts, deposit accounts and cash, equipment, fixtures, general intangibles, goods [and] inventory.”
The announcement comes a week after the firm agreed to loan Bakers Footwear Group Inc. $5 million to use as working capital. As part of that agreement, Madden was issued 1.8 million shares of common stock, bringing its equity interest in Bakers to just shy of 20 percent.