Zale Gets New Loan and Bank Agreement

Zale Corp. announced a suite of agreements aimed at solving its recent problems.

First, the company closed on a new $150 million, five year senior secured term loan provided by Golden Gate Capital, a private equity firm with extensive retail investments.

Zale had previously warned that it “may not have sufficient liquidity to meet [its] operating needs” if it didn’t receive additional money.

GGC will receive interest and fees on its loan, as well as warrants to purchase common stock, aggregating a 25% equity interest in the company on a fully diluted basis.

In addition, two representatives of Golden Gate Capital — Stefan Kaluzny and Peter Morrow — were elected to serve on Zale’s board of directors. They replace Thomas C. Shull and David M. Szymanski, who have both resigned.

Current chairman John B. Lowe also announced he would not run for reelection when his term expires.

Zale has also closed on a new bank credit facility that amends and extends its existing asset-backed credit facility.

The new facility consists of two tranches – an extended tranche and a non-extended tranche. The extended tranche has total commitments of $530 million, including an $88 million seasonal adjustment, and expires April 30, 2014.

The non-extended tranche has total commitments of $120 million, including a $20 million seasonal adjustment, and expires August 11, 2011.

The facility has aggregate commitments of $650 million, including a $108 million seasonal adjustment. Previously, Zale’s credit facility totaled $600 million, including a $100 million seasonal adjustment. After application of the net proceeds of the GGC Loan to repay outstanding indebtedness under its existing bank facility, Zale expects to have approximately $160 million in outstanding indebtedness, and available liquidity of approximately $250 million.

The new facility is led by Bank of America, General Electric Capital Corporation and Wells Fargo Retail Finance.

Finally, the company reached agreement with TD Financing Services, a wholly-owned subsidiary of Toronto-Dominion Bank, to offer a proprietary credit card program to its Canadian customers effective July 1, 2010. The program replaces the company’s existing agreement with Citi Cards Canada that expires on June 30, 2010. The new program is for five years, and supports the operations of Peoples Jewellers and Mappins Jewellers.

Zale previously announced it had entered exclusive negotiations with Citbiank to replace its proprietary U.S. credit card program.

The company said the three agreements “significantly expand Zale’s liquidity and provide the stability of long term agreements under which the Company will continue, and in certain areas accelerate, its existing business plans. The Company believes that these agreements will allow it to complete the restructuring of its retail network, continue the expansion of its internet sales efforts, and provide the working capital necessary to execute its merchandising and marketing initiatives.”

“This is an exciting day for Zale, its employees and Golden Gate Capital. This is a great brand with great potential,” said Stefan Kaluzny, a managing director at Golden Gate Capital. “We look forward to partnering with management and supporting the Company as its turnaround plan is executed.”

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