J Jill, a women’s apparel retailer owned by Islamic investment bank Arcapita, saw its debt further downgraded by Moody’s from B3 to Caa1, putting the rating in line with Standard & Poor’s which downgraded the same debt from B to CCC in September 2011.
Both ratings agencies maintain a negative outlook of the $120m in term debt due 2017 that funded part of the $236.5m acquisition. When contacted, Arcapita declined to comment.
Moody’s expects J Jill to fall foul of the debt covenants for the year ending January 2012, which become more restrictive in the year ending January 2013, and could lead to a default – although Arcapita retains the right to put additional cash into the company to avoid violating the debt covenants. The troubles at J Jill come at a time when Arcapita is focused on repaying or rolling over $1.1bn due in April 2012.
In addition to seven exits in the year ending June 2011, Arcapita sold a large chunk of its US retail portfolio last summer and has put seven wind farms owned by Dublin-based Eco Wind Power, one of Viridian’s subsidiaries, on the block. That sale is expected to fetch €175m to €200m ($230m-$263m). As with all of Arcapita’s investments – J Jill included – a portion will be returned to investors and therefore won’t be available to repay the outstanding Murabahah.
The question facing Arcapita is likely less whether it will be able to repay the Sukuk from its cash on hand and more significantly whether it can round up enough cash to pay off a portion of the debt and refinance the remainder. Arcapita’s cash balance was $19m as of September 30, 2011 according to its most recently published financial statements. An Irish newspaper covering the wind farm sale reports that Deutsche Bank and RBS are advising Arcapita on the refinancing process.