Home Interiors Refurbishes Debt

Home Interiors & Gifts will face an increased debt load under its new $370 million bank loan led by J.P. Morgan. The new debt will be used to retire approximately $147 million in preferred stock and accrued dividends as well as refinance the company's existing $168.7 million term loan and $30 million revolver. Hicks, Muse, Tate & Furst owns the majority of the company after a recapitalization in 1998. Standard & Poor's has, in turn, assigned the new loan a B rating and lowered Home Interiors' corporate credit rating to B from B+ and the company's subordinated debt rating to CCC+ from B.

With about $475 million in total debt expected after the transaction, Martin Kounitz, an analyst at S&P, noted that Home Interiors would be highly levered. The transaction is expected to weaken the company's credit ratios, sending its leverage multiple to 4.5-5 times from about three times. Interest coverage will also likely fall below three times from about 3.6 times. While Home Interiors' EBITDA for 2003 was flat compared with the previous year, profitability from increased volume was offset by charges related to the company's 50% off sale. In general, though, the company has improved operationally over the past few years, noted Kountiz.

S&P notes that Home Interiors' direct-sales business model exposes the company to a high level of risk. Under this model, the company sells its decorative accessory products to sales representatives, who resell the products through a party-plan method. These sales are then subjected to the changes in incentives for its sales staff, the experience and training of those personnel and the competition for experienced representatives. Disruptions in the fulfillment of the orders also affect sales.

S&P has assigned a 2 recovery rating to the new loan, which will include a $320 million term loan and a $50 million revolver. The loan is backed by substantially all of Home Interiors' domestic assets and lenders can expect the asset values to provide a substantial recovery of principal in the event of default. In addition, due to the refinancing, the company will have minimal maturities until 2008. Kenneth Cichocki, senior v.p. and cfo, did not return calls by press time.