Compass Diversified Looks to Cut Debt in ‘Most Challenging’ Time

(Bloomberg) -- Private equity firm Compass Diversified said Thursday it’s exploring whether to sell some businesses to reduce debt, as it prepares to restate financials after alleged fraud at its high-end jewelry subsidiary.

Reducing debt is a top priority because the firm is currently out-of-compliance with leverage ratio covenants in its credit facility, Compass Chief Executive Officer Elias Sabo said on a conference call.

“This has been, without question, the most challenging period in (Compass’s) history,” Sabo said.

Compass is in active discussions with senior lenders regarding an amendment to its credit agreement that would give Compass additional flexibility with regard to its current debt levels, company officials said on the call. Bloomberg News reported in August that a group of Compass bondholders had sought advice from law firm Kirkland & Ellis. 

Compass is preparing to release restated financial statements for 2022 through 2024 after it announced in May that it discovered irregularities at its Lugano Diamonds & Jewelry Inc. subsidiary. Lugano filed Chapter 11 last month after accusing its founder of inflating revenue by misrepresenting diamond investment contracts he entered into with clients.

Compass Chief Financial Officer Stephen Keller said that the firm anticipates it will be able to comply with its leverage covenant in 2026. However, the firm is also exploring options for divesting one or more of its subsidiaries in order to accelerate a reduction of Compass’s debt, Keller said.

The alleged fraud at Lugano was confined to that business and didn’t impact Compass’ other subsidiaries, the firm said on the call. Compass’ subsidiaries also include feminine care business The Honey Pot, and Arnold Magnetic Technologies.

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