DDJ Capital Management and Levine Leichtman Capital Partners are betting on a turnaround in fortunes for St. Louis-based furniture company Falcon Products. The two are leading a richly priced $135 million credit facility for Falcon that takes out previous lender Oaktree Capital Management and gives the hobbled company at least a year to turn around its business. "We think that there is pent-up demand and Falcon is a good company that deserves the extra runway. We think we are making a good loan for our position in the capital structure," said John Ehlinger, v.p. for DDJ.
If the hospitality business does turn around then it will be another chapter in a story of shifting lenders and amended debt agreements. "Falcon's problems began when they bought Shelby Williams, a hospitality furniture company, and funded the acquisition with a $100 million bond issue in 1999. As the hospitality industry fell off the cliff after Sept. 11, revenues in that division were cut in half," explained Chris Shepard, executive v.p. and head of corporate finance at Imperial Capital, which advised Falcon on the refinancing. "The company also had significant bank debt and in order to limit amortization they did a second-lien transaction with BackBay Capital in 2003. They then replaced that deal with a larger deal to provide more liquidity in January of this year."
That is when Oaktree became involved, putting in place a $33.8 million revolver agented by Fleet Bank, a $5.6 million "A" loan and $50 million non-amortizing "B" loan, taking out BackBay and a group of lenders that also included Highbridge Zwirn and Hilco Capital. The "B" paid interest at 16% before being amended and upsized to $60 million with the spread increased to 18%. "The Oaktree transaction was a good deal at the time, but the covenants became restrictive and they continued to need liquidity," said Shepard. "We went to market at the company's request to refinance Oaktree, increase liquidity and remove the near term restrictive covenants to give the company time to complete its operational turnaround."
Falcon turned to distressed-debt specialists Imperial last August when it broke maintenance covenants and liquidity dried up. Imperial worked quickly to bring in the new participants. "They did an outstanding job," said Gene Fleetwood, v.p. and cfo of Falcon, who explained that the new facility essentially opens up availability, especially with the revolver. He said they had three options prior to the new financing. "You sell, restructure or obtain new financing. . .This new financing gives us the opportunity to execute the strategic business plan."
Oaktree was paid a 10% prepayment penalty--approximately $6.2 million--to be refinanced, said Fleetwood. "They had a plan for the company, but we had a three-pronged strategy when we started this process," he said. Commenting on the difference in opinion with Oaktree, he stated, "Before we refinanced, we were doing it with a banker and not a builder." Oaktree officials did not return calls.
The new financing still does not come cheap and consists of a $70 million "A" loan that is priced at LIBOR plus 9% and is held largely by DDJ, but also Airlie Opportunity Fund, Ore Hill Hub and QVT Fund. There is also a $45.7 million "B" loan held primarily by Levine. This has been issued at a discount--$40 million--and is priced at 15%, including 14% cash prepaid at closing and 1% PIK in the first year. In years two and three it will be 7.5% cash and 7.5% PIK. The company is also issuing half a million shares to the term "B" lenders. There is also a $25 million revolver provided by Bank of America that is priced at LIBOR plus 2 3/4%. Still, Shepard believes that now they have a good chance. "You had a great company with a bad balance sheet."