Barneys Debt

Introduction

There are many possible reasons for a company to reform its capital structure. Factors such as the business’ financial objectives, long-term and short-term goals, and contractual obligations will determine the correct method to reach its preferred capital structure. One common method is to perform a debt for equity swap. This is when debt is exchanged for a predetermined amount of equity.

Barneys New York announced on May 7, 2012 that they would be conducting a debt for equity swap. Barneys New York is an American department store chain that has retailer locations is New York City, Beverly Hills, Boston, Chicago, San Francisco, Dallas, Las Vegas, Scottsdale, and other locations across the United States (History of Barneys, 2012). According to Bloomberg.com, Perry Capital took over Barneys New York in a debt-for-equity swap that reduced the luxury retailer’s borrowings by $540 million (Ajello, 2012). The article noted that Perry now has the majority control and partnered with billionaire Ron Burke’s Yucaipa Companies investment firm in the conversion. This transaction will reduce Barney’s debt to $50 million from $590 million (Ajello, 2012).

Discussion

There are several reports about this transaction and most of them offer the same information. According to Market Watch – The Wall Street Journal (2012), the conversion of debt for equity was needed to reduce Barneys long-term debt. This article quoted Barneys Chief Executive Officer, Mark Lee, saying, “This is an exciting moment in the history of Barneys New York.” The agreement for conducting the debt-for-equity swap will increase free cash flow that can be used to reinvest into the company’s retailer stores, its website, and help prepare them financial for the future. Mark Lee also stated, “We are extremely pleased to have reached an agreement with our partners that will significantly reduce our debt and provide the company with the funding to accelerate the execution of our...