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RBS Launches Financing

24 Jun 2005

The Royal Bank of Scotland and Citigroup are leading a $305 million bank deal for United Subcontractors (USI) that backs the $43 million acquisition of Construction Services and Consultants (CSCI).

The Royal Bank of Scotland and Citigroup are leading a $305 million bank deal for United Subcontractors (USI) that backs the $43 million acquisition of Construction Services and Consultants (CSCI). The debt also provides a $20 million distribution to shareholders and refinances $214 million in existing debt.

"It was an opportunity to take advantage of the debt markets and reduce the cost of capital," said Tim Gallagher, cfo, of the decision to refinance. The new facility consists of a six-year, $40 million revolver and a seven-year, $265 million term loan "B." Pricing is LIBOR plus 2 3/4% on both tranches. Total leverage is less than three-and-a-half times, all senior. The bank meeting was held Wednesday in New York.

Wind Point Partners acquired United Subcontractors, a Salt Lake City-based company that installs insulation, in October 2004 with a combination of $216 million of bank debt and $72 million of preferred equity.

RBS and Citigroup also led the previous debt, which consisted of a $30 million revolver, a $155 million "B" loan and a $26 million second-lien "C" loan. Pricing on the first lien was LIBOR plus 3 1/4% and LIBOR plus 7% on the second lien (LMW, 10/1, 11/5).

Gallagher said USI will look at additional small acquisitions in the future, but nothing the size of CSCI. He said he has no timeline of when that next acquisition could take place. The goal of the company is to "increase market share in the insulation business and, in a nut shell, to become a more complete construction services provider," Gallagher said.

Moody's Investors Service assigned a B1 rating to the new senior secured debt. The ratings are constrained by the company's aggressive financial policy, high leverage, low tangible net worth and the cyclical nature of the construction industry. Moody's states USI's recent performance has been above expectations. But the dividend reduces this improvement to its balance sheet. The ratings are supported by USI's free cash flow --$49 million in 2004 as compared with $39 million in 2003 -- and strong margins. Its EBITDA margin has been growing steadily the past four years and for 2004 reached 19%, up from 17% in 2002.

24 Jun 2005

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