Directed Electronics Levers Up For Dividend

Directed Electronics will face an increased debt load under its new $138 million secured credit facility and $75 million of subordinated bonds. The loan will back a dividend of approximately $87 million to private-equity firm Trivest and refinance an existing facility. "They've taken on a fair amount of debt to pay the dividend and taking on that debt will limit their financial flexibility to invest in new technologies and brand support," said Kevin Ziets, an analyst at Moody's Investors Service.

The rating agency has assigned a first-time B2 rating to the loan. When launched last month by Wachovia Securities and CIBC World Markets, the credit comprised a $25 million revolver and a $131 million "B" loan, but since then the "B" has been decreased to $113 million. Pricing on the institutional loan also flexed up 25 basis points to LIBOR plus 4 1/4%. A Wachovia spokeswoman declined comment and CIBC and Trivest officials did not return calls.

After the dividend is paid out, Ziets noted that Directed Electronics will be significantly leveraged. "Compare that to using the money to invest in market efforts, R&D, an acquisition...the company is incurring leverage without obtaining any revenue strings," he noted. Adding to the analyst's concerns about the manufacturer and brander of car security systems are the company's narrow product space and product ceiling. According to Ziets, without enough investment in innovation the company's products could eventually hit a saturation point. Richard Hirshberg, cfo and v.p of finance and operations of Directed Electronics, did not return calls.

However, in Ziets view positive considerations include the company's strong cash flow and diverse customer base. Directed Electronics has a strong position in the automotive aftermarket, a history of developing new products and the capacity to transfer customers from traditional products into more value-added lines such as higher-priced security systems.