Investors aren't rolling over and begging for PETCO's $850 million covenant-lite deal, which hit the market last Tuesday. The influx of covenant-lite deals seen last spring had, for the most part, ended, and PETCO is one of just a few that has come to market recently.
Led by Credit Suisse, Bank of America and Wells Fargo, the credit is split into a six-year, $200 million asset-based revolver comprised of a $180 million last-in, first-out tranche and a $20 million first-in, last-out tranche, and a seven-year, $650 million term loan "B" that will be used to complete the financing for the merger and repay PETCO's existing debt. Pricing on the revolver is LIBOR plus 1 1/2% on the LIFO tranche and LIBOR plus 2 1/2% on the FILO tranche. Pricing on the term loan "B" could not be confirmed, but was expected to also be LIBOR plus 2 1/2%.
"I would've liked to have taken a look at it, but not if it's covenant-lite," said one investor who was disappointed with the deal. Other investors thought that although it was covenant-lite, the credit was actually gaining traction in the market. Bear Stearns' $250 million term loan for ACE Cash Express that launched last month was also covenant-lite, according to an investor. It could not be determined why bankers decided to make these structures covenant-lite.
The financing is being used by Leonard Green & Partners and Texas Pacific Group to take the pet supply company private in a $1.8 billion acquisition. Debt leverage on the term loan "B" is approximately 2.96 times, according to a Securities and Exchange Commission filing. Standard & Poor's downgraded PETCO's corporate credit rating to B from BB and assigned the term loan a B with a 2 recovery rating. The ratings agency cited a highly leveraged pro forma capital structure, thin cash flow protection measures and the highly competitive and fragmented pet supplies market as reasons for the ratings.
PETCO tapped the market in January 2005 to refinance existing debt with a six-year, $350 million revolver led by Wells Fargo. Pricing was LIBOR plus 137.5 basis points and had an accordion option to extend the facility for an additional year and increase the loan by $100 million, according to a company release.
Calls to Rodney Carter, cfo, were referred to a spokesman who did not return calls. A spokesman for Leonard Green and Texas Pacific declined comment.