Gap to buy back debt with bond sale of $1.5B

Gap Inc. announced a $1.5 billion (U.S.) junk-bond sale Monday to help it buy back expensive debt raised earlier in the pandemic last year. The deal will slash the company’s borrowing costs as it continues to focus on growth after COVID-19 hurt clothing sales.

The new note offering is split into two parts, and early pricing discussions are for a low-four per cent yield for the eight-year tranche, and 25 basis points more for the 10-year portion, according to people familiar with the matter.

That marks a steep decrease in the cost of borrowing for the San Francisco, Calif.-based company. The new unsecured notes will help fund a tender offer to buy back three secured bonds that Gap issued in April of 2020 with coupons ranging from 8.375 per cent to 8.875 per cent.

The existing notes are backed by a first-priority claim on the company’s real estate, intellectual property and equity interests of some domestic units, and helped the company shore up liquidity last year.

Gap’s tender offer, which investors can choose to accept or not, will be funded by proceeds from the new note sale and cash on hand, according to a news release.

The firm will pay investors a premium ranging from 106.25 to 116.5 cents on the dollar, depending on the notes and by which deadline investors say yes.

The early deadline for the offer is Sept. 24, and the final deadline is on Oct. 8.

The company is also asking investors to accept changes to bond documentation that includes eliminating certain restrictive covenants and releasing the collateral for the notes. Its existing bonds currently trade well above par, ranging from 109 to almost 116 cents on the dollar, according to Trace.

Gap is following companies including cruise line Carnival Corp. in buying back expensive debt raised in the earlier days of the pandemic.