Market Position Supports Brenntag LBO Loan

Brenntag's new E1.222 billion bank loan is supported by the company's leading market position in the chemical distribution industry in Europe and Latin America and its number three position in the North American market. The key drivers are Brenntag's leading market position and its diversity, noted Martin Amann, an analyst at Standard & Poor's.

The loan backs Bain Capital Partners' leveraged buyout of the company from Deutsche Bahn. S&P assigned a BB- rating to the E1.162 billion senior secured portion of the deal comprising three term loans, a revolver and an acquisition facility. The transaction also includes a E60 million senior subordinated "D" term loan, to which S&P has assigned a B rating. Goldman Sachs and Citibank lead the financing, while Dresdner Bank, Société Générale, ABN Amro and HypoVereinsbank are mandated lead arrangers, but not bookrunners.

In addition to the key drivers, as chemical companies consolidate and look to outsource their distribution operations, Brenntag's volumes should increase. The company also has a variable cost structure, which allows it to maintain operating margin stability. Going forward, S&P notes that non-lease adjusted EBITDA and EBITDA margins should remain near 2003 levels of E240 million and 5.3%, respectively. Market players had been concerned about wide covenants and cash flow outflows. But S&P noted that free cash flow genearation is expected to be moderate but sufficient to cover mandatory debt repayments under the term loan. The credit also contains a covenant restricting leverage.

Meanwhile, S&P notes that the company's financial profile after the buyout is aggressive. Total debt to transaction and lease adjusted EBITDA is expected to clock in around 4.4 times, and pro forma cash interest coverage is expected to be three times for fiscal 2003. But improvements are expected in the medium term with the lease-adjusted EBITDA climbing down to about four times and the interest coverage improving to about 3.5 times.

As a part of the acquisition of Brenntag, Bain will also acquire the Interfer steel distributor operations. Although these operations are significantly weaker than Brenntag's credit quality, S&P notes that they will not constrain the ratings. Furthermore, the transaction has been structured to allow for a separate sale of the Interfer operations as the businesses of Interfer and Brenntag are fully separated, said Amann. A Bain spokesman declined comment.