Política

'China's LVMH' Shandong Ruyi resists Lycra sale in favour of IPO amid debt crisis: sources

Gill Ramirez
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The ratings agency cited the weak global economic outlook exacerbated by the coronavirus pandemic but said Lycra’s high leverage, as well as the indebtedness of Shandong Ruyi, were also factors

HONG KONG (Reuters) – Fashion conglomerate Shandong Ruyi, best known for its ambition to be the LVMH of China, has brushed aside a sale of textile maker Lycra proposed by Lycra’s creditors and is instead looking to publicly float the business, two people with direct knowledge told Reuters.

Debt-laden Shandong Ruyi Technology Group (Ruyi) bought control of The Lycra Company (Lycra) from U.S. conglomerate Koch Industries for $2.6 billion in 2019, borrowing about $1 billion for the deal.

Lycra’s weakening financial performance has prompted some of its creditors to hire restructuring firm Alvarez and Marsal (A&M) as an adviser, fearing Lycra may default, said the two sources.

A&M had over the past two months sounded out potential buyers for Lycra,said one of the people, who declined to be identified due to confidentiality constraints.

But no deal materialized as Ruyi opposed the idea and preferred to hold on to the company while it looks for other means of rescue, the people said.

One of the sources said Ruyi believed Lycra would be better valued via an IPO, rather than a trade sale. Last year Ruyi had suggested it could list the company on China’s new tech-focused STAR market.

The sources declined to be named because the information was not public. Ruyi and A&M declined to comment.

Moody’s in April downgraded Lycra’s debt ratings by two notches to Caa2 with a stable outlook, having already dropped it by two notches in December.

The ratings agency cited the weak global economic outlook exacerbated by the coronavirus pandemic but said Lycra’s high leverage, as well as the indebtedness of Shandong Ruyi, were also factors.

Ruyi is rated Caa3 by Moody’s. In a note this week, the agency estimated Ruyi’s debt to Ebitda ratio – a measure of leverage that compares borrowings to operating profits – to reach between 25-30 in the next two years, from 10 in 2019.

Ruyi holds 53.4% of Lycra, with Koch Industries holding 22.2% and Itochu Group subsidiary CFC holding 15.5%. Minority shareholders own the remaining 8.9%.

Ruyi’s and Lycra’s woes have been reflected in sharp drops in the bonds sold to pay for Lycra’s purchase. The mid price on Lycra’s 7.5% May 2025 bond fell from about 80 cents at the end of 2019 to about 55 cents in April, according to Refinitiv. It was quoted at 69.375 cents on Thursday.

LVMH hopes

Ruyi, whose roots are in the textiles industry, began a buying spree in 2015 that has included French fashion house SMCP, Aquascutum and Savile Row tailor Gieves & Hawkes.

In 2018, Ruyi chairman Qiu Yafu told Reuters that LVMH was the company’s role model, adding “we are still a far cry from it but that’s our vision.”

But Ruyi has been struggling with the debt taken on to fund the deals. The firm narrowly met a December deadline to repay $345 million in offshore bonds while creditors of 1 billion yuan ($143.94 million) in onshore notes have agreed to extend a repayment due in March to December.

In May, Japanese apparel company Renown, which Ruyi owns, filed for bankruptcy.

Reporting by Kane Wu and Scott Murdoch in Hong Kong; additional reporting by Andrew Galbraith in Shanghai; Editing by Jennifer Hughes and Kim Coghill