Loan investors are griping about an increasing number of dividend deals that are leading to outright sales and effectively canceling the proposed bank deal after they had done the credit work. Clayton Dubilier & Rice cancelled a dividend deal for Kinko's after opting to sell the company to FedEx Corp. and most recently Oak Hill Capital Partners decided to sell Caribbean Restaurants to Castle Harlan, canceling a dividend deal that had already been priced.
Credit Suisse First Boston and Wachovia Securities were leading the Caribbean Restaurants recap and will lead the new financing backing the Castle Harlan acquisition. The Kinko's dividend financing was led by Bank of America and J.P. Morgan, but a bank deal was not on the cards to back the FedEx acquisition. Glenn Stewart, head of B of A's syndicate desk, declined comment. Wachovia and J.P. Morgan bankers did not return calls.
A couple of investors believe it's being done deliberately. One loan investor described these dividend deals as a cover bid; another referred to them as a stalking horse. "It's a backup plan that doesn't cost anything to drive a better price out of the intended buyer," one said. A buyside analyst even claimed the Caribbean recap was brought to market with no intention of follow through in order to drive a higher bid from Castle Harlan. But bankers vehemently deny that claim.
"Whoever said that we brought this deal to market knowing that the deal was never going to close is absolutely wrong," said Don Pollard, global head of CSFB's syndicated loan group. "I think the sponsor, in this case Oak Hill, like any other sponsor is always going to be reviewing different alternatives. They got a price that they liked and decided to sell the company rather than do the leveraged dividend." Tyler Wolfram, a partner with Oak Hill, said the firm had every intention of closing the recap deal. "We wouldn't have spent all of the time we did pursuing the recapitalization if we didn't intend to close it," Wolfram said. "It's just that this opportunity came up quickly and it made a lot of sense for all parties to pursue it." A Castle Harlan spokeswoman said to the best of the company's knowledge the dividend recap was legitimate.
Wolfram said he expects those who did the credit work to be more enthusiastic that $150 million of junior capital is now coming into the company rather than a dividend being paid out. "We're bringing to market the financing to support the new buyout of the company and our investors will have the opportunity to participate in that," Pollard said. "Those who committed to the original deal will have first look at the new financing," he added. "My understanding is that the buyers are actually excited that the size of the first lien is larger now because there is a significant appetite," Wolfram said.
One investor irritated that he did the work on the first deal said he was annoyed enough to stay away from the new deal. But most everyone is expected to still pile in. The analyst said staying away from the new deal would just "cut your nose off to spite your face."
The new deal, which is launching tomorrow, comprises a $30 million revolver and $180 million "B" loan. Both tranches have a tenor of five years. The dividend recap deal comprised a $30 million revolver and $150 million first-lien "A" loan, both priced at LIBOR plus 3% and an $80 million second-lien term loan at LIBOR plus 6 1/2%.