Stretched to the Max, Shandong Ruyi Loses Control of Lycra

Key Takeaways:

• Three and a half years after spending $2.6 billion to buy 53% of Lycra, Shandong Ruyi has lost control of the fashion brand after creditors seized a majority of the company last week
• Ruyi’s brief foray into the global fashion industry has backfired spectacularly, with the company defaulting on debt it used to acquire global brands like SMCP and Lycra 

By Andrew Curran

Few things are more forgiving than Lycra, the stretchy material that can comfortably cover up just about anything. But the last few years have been anything but comfortable for Lycra Co., which manufactures a wide range of clothing made from the material.

Chinese textile conglomerate Ruyi Group (002193.SZ) bought Lycra in 2019, only to default on debt payments related to the purchase not long afterwards. That set off a wild chain of events that were only resolved last week when Ruyi lost control of the company to a group of private equity buyers, according to a Lycra announcement.

Not exactly the smoothest ride for a company whose main asset is a material known for its sleek surfaces and feel that has made it a favorite for its body-hugging qualities.

Lycra is made from elastane, a highly elastic synthetic fabric developed by DuPont DD in the mid-20th century. Initially proving popular as comfortable form-fitting underwear and hosiery, elastane soon made the leap into exercise clothing, compression clothing, and by the 21st century, everyday leisure wear.

Today the term Lycra is not just a brand, but has become a generic term for any clothing made from elastane, placing it alongside names like Xerox and Band-Aids as brands that have become synonymous with entire product types.

Shandong Ruyi most likely thought such status made its Lycra purchase a slam dunk that couldn’t go wrong. But that clearly wasn’t the case, reflecting a broader type of inexperience that causes many Chinese acquisitions of big global brands to go awry.

Lycra went through several owners after leaving the DuPont family, before landing in China when Ruyi purchased 53.5% of the company in 2019 from U.S.-based Koch Industries for $2.6 billion.

Ruyi’s own origins date to the early 1970s when it was known as the humble Shandong Jining Woolen Mill. For most of its life the company made boring but profitable textiles, putting it at the forefront of a wave that saw China become the world’s biggest clothing maker.

Last decade longstanding Chairman and former President Qiu Yafu decided to take the next step by transforming the company from an anonymous textile manufacturer to a global luxury brand owner. Such owners earn far higher margins from their products than simple manufacturers, even though most Chinese companies have little or no experience in the expensive and lengthy process of such brand building.

Lycra was one of a number of fashion brands Ruyi purchased in its strategy, alongside French brands SMCP andCerruti 1881, and British names Gieves & Hawkes and Aquascutum. The buying spree saw Ruyi use $1 billion in debt for the Lycra deal that closed in February 2019, including a $400 million loan arranged by Credit Suisse. But just three months after announcing the deal, Ruyi defaulted on that loan.

One month after the May 2019 default, Debtwire reported that Ruyi had staggering debts totalling almost $4.4 billion. That problem quickly spun out of control, since Ruyi’s day-to-day operations weren’t generating enough cash to meet its repayment obligations. “A series of debt-funded acquisitions, combined with the poor performance from its legacy textile business, has left Ruyi with high leverage and weak liquidity,” the June 2019 report said.

Slow unravelling

The default set off a slow-motion unravelling of Ruyi’s luxury dream, with brands starting to fall by the wayside as the company’s creditors launched litigation to get their money back. The onset of Covid-19 less than a year later further complicated proceedings and, in the case of Lycra, probably slowed down – but didn’t stop – the unravelling.

Meanwhile, some creditors from the Lycra financing deal hired a restructuring firm to talk to potential buyers for the U.S. brand in the event of a further default. But Ruyi, despite its debt problems, resisted selling. Instead, it hoped to raise money through an IPO for its Shandong Ruyi Technology Group (Ruyi) unit, Lycra’s actual owner, on China’s Nasdaq-style STAR market.

But before that could happen, Ruyi defaulted last October on more debt, in this case a 250 million euro ($261 million) bond repayment related to its earlier 2016 purchase of SMCP. Following that default, bondholders took control of SMCP, dismissed its five Ruyi directors, and set about organizing an orderly transition of ownership.

The SMCP default seemed to spook Lycra creditors, who were trying to reorganize the still-unpaid debt from the 2019 default. Within months, those creditors, including Hong Kong-based China Everbright Ltd., Tor Investment Management and South Korean private equity firm Lindeman Partners and its Lindeman Asia affiliate, moved to take control of Lycra.

Everbright, a financial conglomerate whose asset management and private equity arm has nearly $26 billion under management, was the biggest creditors behind the Lycra takeover play. Tor Investment is a smaller, lower-profile private alternative asset manager specializing in Asia-Pacific markets. Korea’s Lindeman Partners is similarly small, with around $1 billion in funds under management in what it calls “alternative investments” around the world.

Despite their different backgrounds, all three private equity companies came together to try and recoup their investment, and last week finally gained control of Lycra, wrapping up a process that began in February. The new majority ownership consortium appears intent on keeping Lycra CEO Julien Born in place, and instead was simply seeking to wrest control of the company from Ruyi.

“I am thrilled to have the full support of our new shareholders and incoming board of directors as we begin the next chapter in the Lycra Company’s story,” said Born in a statement announcing the change. “This new ownership structure provides the necessary backing from experienced investment professionals who share our long-term vision.”

Meanwhile, Ruyi’s moment on the global fashion runway appears to be over. Support from the company’s local government in the city of Jining in Shandong province appears to have evaporated, and Qiu Yafu now cuts a far lower profile than he once did when he hoped to make Ruyi into China’s first global luxury brand owner.

Lycra’s new owners and management want to focus on business, and appear to have the resources to do just that without the burden on Ruyi’s big debt load. “The Lycra Company is in a strong financial position,” said a spokesperson for the new majority owners in last week’s announcement. “Lycra has a solid foundation for long-term growth, and we look forward to working with the team to provide continued support for the company’s future growth.”