Protests from second-lien lenders forced Credit Suisse First Boston to rework the terms of Oriental Trading Company's proposed dividend deal last week. The second-lien tranche, along with a first lien led by BNP Paribas, is backing a $100 million dividend to owners Brentwood Associates. But second lien investors protested over the proposed amendment, which would increase the size of the tranche and cut pricing by 50 basis points all while the company would avoid paying call protection sitting on the existing deal. In the end investors will end up getting paid off at the premium, though the pricing on the new deal is a further 75 basis points lower than the spread they were offered originally.
"It happened because people objected," said one banker familiar with the deal. "They had call protection in place; they wanted to get paid call protection rather than repricing at the higher level and pay the lower fee. They said, pay us the fee we are owed."
The proposed deal was shaping up into a bit of a standoff. When lenders first balked, CSFB was set to enact a "yank a bank" clause that would allow it to remove minority lenders that were blocking the deal. But the existing lenders dug in and refused to ratify the amendment. Market players noted that it is rare for buyside displeasure to actually have an affect in this issuer-friendly market. "It happens maybe 10-20% of the time," a buysider said. "A lot of times they threaten but nothing gets changed."
The investors were initially offered a $30 million add-on to the existing $257 million first-lien and a $42 million add-on to the existing $80 million second-lien. In addition to the increased debt on the second-lien, pricing was to be reduced from LIBOR plus 6% to LIBOR plus 5 1/2%, a move buysiders would not accept because the sponsor attempted to avoid paying out the 102 call protection. But the parties compromised. The revised agreement, launched Feb. 15, now includes an all new second-lien loan of LIBOR plus 4 3/4% and call protection at 102.
Things went smoother on the first lien, where BNP Paribas cut pricing to LIBOR plus 2 1/2% from LIBOR plus 2 3/4%. The bank also added a step-down to LIBOR plus 2 1/4% when total leverage is below 4.75. That move was widely accepted by all of the lenders, a banker said. One buysider estimated that with leverage currently over 5 times, it could take a quarter or two before that could take effect.
William Barnum, a co-founder of Brentwood Associates and director of Oriental Trading, said the company made the decision to recapitalize because its "performance has been very strong in the last year, and in our view, the company was under leveraged relative to its debt capacity and future prospects." He could not comment on the second-lien lenders.
Barnum said the company has not taken part in any acquisitions under his tenure and it is not something they are looking to do. "I think our focus will be on debt reduction," he said. "If we found a company we liked that was in the constraints of our agreements, we wouldn't hesitate to do an acquisition. But since we haven't done one and we don't have one pending, I think our likely focus will be debt reduction. We're not really out looking to buy things."
