Saks May Default on Convertible Debt

News of the default notice prompted Moody's and Standard & Poor's to downgrade their ratings on Saks' debt.

Saks Inc. is getting a blunt lesson in the consequences of filing financials late.

The retailer, which is embroiled in an accounting scandal, announced that it recently received a notice of default regarding its $230 million 2 percent convertible senior notes due March 15, 2024. The notice was given by a hedge fund that owns more than 25 percent of the issue; the company did not disclose the name of the fund.

News of the default notice prompted Moody’s and Standard & Poor’s to downgrade their ratings on Saks’ debt.

The notice of default asserts that Saks breached a covenant in the notes that requires the company to file its annual report within 120 days of its January 29, 2005, fiscal year-end. Saks, which still has not filed that annual report or its quarterly report for the period ended April 30, added it expects to do so by September 1.

The company has 60 days to file the reports or work out a deal with its creditors. Otherwise, Saks stated, it will fall formally into default and could be required to pay some or all of its $990 million of senior notes. Saks added that it currently has $324 million in cash on hand to repay its debt and will have another $620 million when it sells assets to Belk Inc., a transaction expected to close around July 5.

If additional funds are needed to repay the accelerated amounts, the company stated that it plans to borrow under its credit facility, which currently has about $650 million of unused capacity. The company added that those lenders have waived any event of default that may arise from the company’s failure to file its financial statements.

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