Several investors in Nalco Holdings' bank debt are upset about the company's offering of $450 million of senior discount notes to fund a dividend, only months after the leveraged buyout was completed by The Blackstone Group , Apollo Management and Goldman Sachs Capital Partners. The miffed loan investors--who already view the company's leverage as being too high--are complaining that they are being stretched. "The credit risk profile has changed and we're not being adequately compensated for the risk in the profile," one loan investor said. Based on pro forma debt of $3.7 billion, adjusted for the new financing, debt-to-EBITDA, excluding projected cost savings, would increase to 6.8 times from six times.
But Chin Chu , senior managing director with Blackstone, disagreed that the dividend impacts debt holders. "It does not change the cash interest burden of the company for the next five years," Chu said. The debt is being incurred at the holding company level and not the operating company Nalco Co. "The best thing to do for the company is to continue deleveraging at the operating company level. We think the company is a very attractive candidate for an IPO," Chu said.
Nalco currently has a $250 million revolver, $300 million "A" loan and $1.3 billion "B" loan. The "B" tranche was part of a bond and bank debt package backing the $4.2 billion purchase of Nalco, a water treatment provider and chemical processor. "Theoretically the term loan hasn't been impaired by the bond issue. It's so far subordinated to the bank loan it is insignificant," said John Rogers , v.p. and senior credit officer, with Moody's Investors Service . But these new notes add more debt to overall company operations. "[The increase in leverage] limits their financial flexibility. There isn't a lot of room to handle any exogenous event that might impact financial performance." he said.
Citigroup , Bank of America , J.P. Morgan , Deutsche Bank , Goldman Sachs and UBS are the lead arrangers on the bank debt. Goldman underwrote the bond. Nalco officials referred calls to Blackstone officials.