Masonite International has so far delivered on pledges to reduce debt through the divestiture of its Towanda manufacturing plant, but the company still faces challenges in dealing with the heavy debt load incurred to finance its combination with Premdor last year. The Towanda sale, mandated by the Canadian Department of Justice, enabled the Mississauga, Ont., door manufacturer to repay a $100 million term loan, said Joseph Snider, senior analyst atMoody's Investors Service. Now Masonite is attempting to repay a high-cost subordinated seller note and replace it with an expanded bank facility, he noted.
Masonite is planning to take the note out for three reasons. First, the company is paying the $126 million note off at a $21 million discount. Second, the early payment will result in substantial savings from the avoidance of accretion to the principal if the note needed to be rolled over. And third, the company will benefit from the interest-rate differential on the bank and note coupons. SunTrust Bank is leading the new bank lines, which have been rated Ba2, the same as the previous bank debt.
The loan is split into a $100 million revolver, a $100 million "A" term loan and a "B" term loan of up to $500 million. The new restated bank line has a first lien on all tangible and intangible assets and also will be secured by a pledge of 100% of the stock of Masonite's domestic subsidiaries and two-thirds of the stock of its foreign subsidiaries. The company now will have a debt-to-EBITDA ratio of 3.1 times, compared to 4.07 times last August.
Going forward, however, Masonite faces challenges in addition to the debt and integration risk. The company is attempting to reposition itself from a generic door company to a recognized consumer products company, with a differentiated brand, Snider noted. The company also has exposure to the cyclical construction and re-modeling markets. But Masonite has generated strong free-cash flow, and the combined company provides considerable benefits, including scale and purchasing power, he said.