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Gap and Farfetch Are Raising Cash—But Here’s What They’re Doing Differently

The coronavirus crisis has left fashion retailers in a serious cash crunch—and though many are hoping to drum up new funds to pay down debt, how they’re going about it reveals much about their bottom lines.

Gap Inc. and Farfetch Ltd. are just two of the clothing sellers that recently priced new offerings, on the heels of similar moves by Macy’s Inc., American Eagle Outfitters Inc., Nordstrom Inc. and VF Corp. And the difference between how Gap and Farfetch approach their offerings says something about whetting the investor appetite for risk.

Gap continues to struggle with the current retail environment, indicating as much last week when it skipped $115 million in April rent payments and sounded the alarm on the possibility its financial engine was running out of gas.

Like many of its peers, the San Francisco-based clothing retailer has already drawn down its entire $500 million availability from a revolving credit line and slashed various components of its operating budget. Now it seeks to raise $2.25 billion of senior secured notes in the form of junk bonds, up from an originally planned raise of $2 billion.

Gap said it priced an offering of $500 million aggregate principal amount of its 8.375 percent senior secured notes due 2023, $750 million of its 8.625 percent senior secured notes due 2025 and $1 billion of its 8.875 percent senior secured notes due 2027. Part of the net proceeds, after payment of fees connected to the offering, will be used to pay down the $500 million it drew from is credit revolver, plus refinance its 5.95 percent notes due April 2021. The balance will be used for general corporate purposes.

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The offering for all notes are expected to close on May 7.

The notes are guaranteed on a senior secured basis by a first priority security interest in certain of Gap’s real property, plus a lien on its intellectual property, equipment, investment property and other intangibles.

Essentially, Gap is now up to its eyeballs in debt.

Two ratings firms last month had already cut Gap’s credit rating and moved it into junk territory. While the new offerings inject much-needed liquidity, they also add formidable debt leverage, not to mention tie up assets that it can’t sell to raise new cash if the situation worsens.

Farfetch, meanwhile, brings a vastly different financial fortune to the table. And the structure of its online platform offers an advantage that store-based merchants can’t compete with. The luxury platform’s note offering, which doesn’t need to be secured by assets, is essentially based on a promise to repay the debt.

The fashion marketplace platform on Monday priced an offering of $300 million principal amount of convertible senior notes due May 2027 in a private placement, unless earlier converted, repurchased or redeemed. Initial purchasers also have the option to purchase under certain conditions up to an additional $45 million principal amount of notes. The notes will be convertible into cash, Farfetch’s Class A ordinary shares or a combination of cash and shares, at the company’s election.

What’s different from Gap’s situation is that the Farfetch notes are senior unsecured obligations. Interest accrual is payable semiannually, and there’s a provision that if certain events qualify as a “fundamental change,” note holders may require Farfetch to repurchase their notes for cash under certain terms.

Net proceeds from the sale of the private placement will be used to fund general corporate purposes, Farfetch said.