How Serious is the Gap Debt?

Gap Inc. (San Francisco) is said to be in danger of violating its $1.3 billion credit agreement, though the retailer argues with critical parts of a report released by Grant's Investor Inc., a research firm that follows the company.

Grant's told The Wall Street Journal that The Gap would violate its agreement if its EBITDA (earnings before interest, taxes, depreciation and amortization) for the fiscal year ending in January 2002 were below $1.084 billion. And that would be a distinct possibility, Grant's said, if the retailer's EBITDA for the fourth quarter of 2001 were no better than its $211 million third-quarter figure.

But The Gap insists that Grant's overestimated the level of EBITDA needed to maintain its debt agreement, as per its bank facilities, by overstating the expected year-end debt levels. If those debt levels were in the range of $2.2 to $2.3 billion, as the company expects, the required EBITDA would be somewhere between $730 and $770 million, not the $1.084 billion that was reported by Grant's.