Coach warned of potential downgrade after Kate Spade buy – Fitch

Rating agency Fitch warned on Tuesday that it may downgrade US handbag and accessories maker Coach to the bottom rung of the investment-grade credit spectrum after it completes its takeover of Kate Spade.

Credit analysts with the rating agency said the $2.4bn acquisition announced on Monday, which includes $2.1bn of new loans and bonds to fund the deal, would increase Coach’s indebtedness and warned the transaction had “integration risk”.

David Silverman, an analyst with Fitch, said he envisioned a one-notch downgrade to triple-B minus, the lowest investment-grade credit rating. Earlier this year, rating agency Moody’s said it was possible Coach could complete a debt-funded takeover of Kate Spade and retain its investment-grade appraisal. Moody’s on Tuesday said it had put Coach’s Baa2 rating on review for a cut.

Coach has turned the page on a difficult few years, when the luxury goods market broadly slowed. The company’s hiring of Stuart Vevers as executive creative director from Loewe, a Spanish handbag maker owned by LVMH Moët Hennessy Louis Vuitton, has revitalised the Coach brand. New products have flooded stores, including a recent collaboration with Rodarte, which this paper described as selling “extraordinary, delicate, red-carpet worthy dresses and gowns”.

Those goods have so far been met by warm consumer interest, despite the company’s decision to cut discounts and pull its goods from some wholesale distributors. Comparable-store sales in North America, a key metric scrutinised in the retail industry, rose 3 per cent from a year earlier in the three months to April 1.