S&P Global Credit Ratings placed the BB+ issuer credit rating of Gap Inc. (NYSE: GPS) under review for possible downgrade today, following the company’s recent announcement that it would spin off its relatively well-performing Old Navy business into a stand-alone public company.
S&P Global noted that the move would slash the revenue base for the remaining company—which will include Gap, Banana Republic, Athleta, Intermix, and Hill City—by roughly half, despite Old Navy accounting for roughly 30% of the total store base across the consolidated enterprise.
While S&P Global believes the spin-off will weaken the competitive position of the legacy business, it also said “the prospective capital structure could balance the less diverse business.” However, the agency added that it does not have any information regarding Gap's plans for the ultimate capital structure. The spin-off is expected in 2020.
Gap’s enterprise value at Nov. 30 was $10.4 billion, in line with its market cap due to an even balance between roughly $1.25 billion each of cash and debt. Its lone outstanding long-term debt issue—the $1.25 billion of 5.95% notes due 2021, which date to issuance in 2011—traded at 104 on Friday post the spin-off announcement, or in line with the weighted average of trades so far in 2019, according to MarketAxess. The T+113 spread on Friday was firm to the T+130 trailing average.
Moody’s characterized the spin-off plan as a credit negative, but made no immediate alterations to the Baa2 long-term rating or stable outlook.