J.P. Morgan and Citibank were said to be in talks last week to revamp KinderCare Learning Centers' $470 million refinancing credit after investors called for more than just stock to back the deal. Kohlberg Kravis Roberts & Co. owns about 80% of the company and traditionally secures its deals only with stock, investors said. But with concerns about issues such as the childcare company's low organic growth rate and negative free cash flow figures, some market players are passing on the deal if it's only secured by stock. One investor added that pricing tweaks could also be in order. The deal launched last month and includes a $350 million "B" loan and a $120 million revolver priced in the LIBOR plus 3-3 1/4% range. A J.P. Morgan spokesman said there were no changes to the credit as LMW went to press last Friday and he would not comment as to future revamp plans. Calls to Dan Jackson, cfo of KinderCare, were not returned.
The only portfolio company that KKR has succumbed to giving up more than stock for collateral was drug store retailer Shoppers Drug Mart, the investor claimed. "[Only having stock security] limits any potential leverage we might have in a stress situation," the investor explained. He said the proposed facility gives investors no ability to foreclose on real properties, essentially offering no "real" collateral. He added that KinderCare's property values could be difficult to assess with possible locations in depressed areas.
But, he added, "You don't usually view these [types of] deals as collateral intensive," he acknowledged. He noted to the sector's credit that daycare rates have steadily increased throughout recent years, providing a potential for profit if capital expenditures decrease. "KinderCare's got a good name," buysiders agreed. J.P. Morgan and Citi bankers did not return calls. A KKR spokeswoman declined to comment.