Salton, maker of the George Foreman grill, is in discussions with its senior lenders to obtain more cash and waivers to fend off a possible Chapter 11 filing. Salton's third quarter EBITDA was negative $24 million from negative $5 million a year ago and its previously profitable George Foreman and Toastmaster lines are showing less than appetizing performances.
Last month the company violated the fixed charge covenant on its credit facility, but obtained a forbearance agreement that provides continued borrowing availability until June 10. "Salton now has a $6.7 million bond coupon payment due June 15 and they have little in the way of domestic cash," noted Duncan Yin, a distressed debt analyst at CRT Capital Group. Salton, which has about $13 million available on the credit, is in talks with lead lenders Bank of America and Wachovia Securities to get waivers and extra cash in the next week, which Yin believes is the most likely and beneficial scenario.
A Wachovia banker could not provide comment and a Wachovia spokeswoman did not return calls by press time. A Bank of America spokeswoman declined comment. David Mulder, executive v.p., chief administrative officer and senior financial officer of Salton, did not return calls.
The lenders already have exposure of about $110 million on the borrowing-base facility and there are significant subordinated interest payments, said one analyst, explaining why they may need to cut off the tap. Salton's bonds, which consist of $125 million of 10 3/4% notes and $150 million of 12 1/4% notes, are trading at 74 and 63, respectively. The revolver has a full capacity of $275 million, but availability is based on accounts receivable and inventory. Sources said the banks are fully covered right now.
Yin argues it would be an extraordinarily aggressive move on the part of the bank group to accelerate the revolver principal at this point in time. "The company is fixable if the banks want to fund them approximately $40-50 million more," he said. If the banks refuse to come up with the money, Salton could also turn to the second-lien market, he noted. The George Foreman product has a distinct seasonal pattern, which is why Salton needs $40-50 million to build up inventory between now and Christmas, Yin explained. Salton has also set targets of $40 million a year in cost savings. "[This] is not unreasonable as is it only 16% of total cost base," he stated. If the banks then decided to curtail liquidity, they could do this after the winding down of working-capital after Christmas and before the first bond maturity in December 2005.
Additionally, by avoiding a near-term bankruptcy, the banks might be able to negotiate a program in which Salton would commit to repatriate some portion of the foreign cash--estimated at $75 million, Yin proposed. If the company files for Chapter 11, it would be much more difficult to move the cash back to the U.S. once foreign trade creditors move against the local subsidiaries, he noted.