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

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

Compass Chief Executive Officer Elias Sabo said in a conference call that reducing debt is a top priority because the company is currently not complying with leverage ratio covenants in its credit facility.

“This was undoubtedly the most challenging period in (Compass’s) history,” Sabo said.

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

Compass acquired Lugano Diamonds & Jewelry Inc. in May. It is preparing to publish revised financial statements for 2022-2024 after announcing that it had discovered irregularities in its subsidiary. Lugano filed for Chapter 11 last month after accusing its founder of inflating revenue by misrepresenting diamond investment contracts with clients.

Compass Chief Financial Officer Stephen Keller said he estimates the firm will be able to comply with its leverage agreement in 2026. But Keller said the firm is also exploring options to divest one or more of its subsidiaries to accelerate the reduction of Compass’ debt.

The alleged fraud in Lugano was limited to this business and did not affect Compass’ other subsidiaries, the firm said in the interview. Compass’ subsidiaries include feminine care company The Honey Pot and Arnold Magnetic Technologies.

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