New Look, a fashion retailer in the UK, is to launch a £800m bond issue as it attempts to refinance towering debts accumulated under private-equity ownership. The company has borrowings of £1.1bn, equivalent to more than five times its current operating profits. The five-year bond issue, if successful, will give the new chief executive, Anders Kristiansen, more financial freedom to pursue a turnaround of the business, which has lost out in recent years to rivals such as Primark, George at Asda and H&M.
The bonds issued by New Look offer an annual income of almost 9 per cent. They come with some asset security but there may not be anything left in a bankruptcy when the lessors of New Look stores will be paid first and the £800m of bonds are considered subinvestment grade.
Explain the relevance of default risk in the corporate bond market and discuss the ways in which investors may identify default risk of corporate bonds.