Gap Selling $1.5 Billion Bond to Buy Back Costly Covid-Era Debt

Gap Inc. announced a $1.5 billion junk-bond sale Monday to help it buy back expensive debt raised earlier in the pandemic last year. The deal will slash the company’s borrowing costs as it continues to focus on growth after Covid-19 hurt clothing sales.

The new note offering is split into two parts, and early pricing discussions are for a low-4 percent yield for the eight-year tranche, and 25 basis points more for the ten-year portion, according to people familiar with the matter.

That marks a steep decrease in the cost of borrowing for the San Francisco-based company. The new unsecured notes will help fund a tender offer to buy back three secured bonds that Gap issued in April of 2020 with coupons ranging from 8.375 percent to 8.875 percent.

The existing notes are backed by a first-priority claim on the company’s real estate, intellectual property and equity interests of some domestic units, and helped the company shore up liquidity last year.

Gap’s tender offer, which investors can choose to accept or not, will be funded by proceeds from the new note sale and cash on hand, according to a news release. The company will pay investors a premium ranging from 106.25 to 116.5 cents on the dollar, depending on the notes and by which deadline investors say yes. The early deadline for the tender offer is Sept. 24, and the final deadline is on Oct. 8.

The company is also asking investors to accept changes to bond documentation that includes eliminating certain restrictive covenants and releasing the collateral for the notes. Its existing bonds currently trade well above par, ranging from 109 to almost 116 cents on the dollar, according to Trace.

In August, Gap topped Wall Street’s expectations with its second-quarter results and increased guidance for the full year, highlighting the recovery for apparel retailers from the coronavirus slowdown.

Gap is following companies including cruise line Carnival Corp. and Delta Air Lines Inc. in buying back expensive debt raised in the earlier days of the Covid-19 pandemic.

The company will hold an investor call for the bond sale at 10:30am in New York on Monday and the deal is expected to price on Tuesday, the people said, asking not to be named discussing a private transaction. Citigroup Inc. is leading the deal.

By Paula Seligson

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