Things Remembered ratings cut by Moody’s after covenant violation

Moody’s downgraded retailer Things Remembered, citing a potential repeat violation of a financial-maintenance covenant as the company’s revenue declines.

Moody’s cut the company’s corporate family rating to Caa1, from B3, and senior secured credit facilities to B3, from B2. The outlook remains negative.

Things Remembered cured a violation of its financial-maintenance covenant in the first quarter of fiscal 2015 via a capital contribution. However, further sales and margin erosion is likely.

“Moody’s expects that revenue declines in the low-single-digit range, combined with step-downs to the net leverage test and minimal cushion on the interest coverage test, could result in another violation of the company’s financial maintenance covenants over the next 12-24 months,” according to a Moody’s statement on June 26.

“The downgrade reflects Things Remembered’s continued weak operating performance and Moody’s expectation that the company will be challenged to remain in compliance with its credit agreement without a meaningful improvement in operating performance or an amendment to the credit facility.”

Moody’s said that $135 million of the company’s term loan due 2018 remains outstanding.

In May 2012, KKR Capital Markets wrapped syndication of a $147 million senior secured loan due 2018 backing a $295 million buyout of Things Remembered by Madison Dearborn Partners. The transaction included $30 million of 6.5-year mezzanine debt and a $163 million of equity.

Things Remembered, based in Highland Heights, Ohio, sells personalized jewelry, drink ware, specialty gifts, home and entertaining products, office and recognition items, and baby and children memorabilia. – Abby Latour

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Capital Southwest hires Weinstein for middle market lending

Capital Southwest Corporation hired Josh Weinstein to source and underwrite for direct-lending and middle-market syndicated credits.

He joins as a principal on the investment team. He will be based in Dallas.

Weinstein previously worked at H.I.G. WhiteHorse, where he sourced and structured middle-market credits across industries for several credit platforms, including a publicly traded BDC. He also worked at Morgan Stanley and Citigroup.

Dallas-based Capital Southwest is a BDC that invests in controlling and minority stakes of private companies. Its shares trade on Nasdaq under the ticker symbol CSWC. – Abby Latour

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BDCs head to Washington to make case to modernize rules

In 2013, Rep. Mick Mulvaney (R-SC) toured the factory of Ajax Rolled Ring and Machine which manufactures steel rings used in construction equipment and power turbines.

The factory, which is located in York, S.C., now employs about 100 people. It has since been acquired by FOMAS Group.

But at the time of Mulvaney’s tour, Ajax was controlled by Prospect Capital, a business development company, or a BDC. Propsect Capital’s investment from April 2008 included a $22 million loan and $11.5 million of subordinated term debt.

Mulvaney said he had never heard of a BDC before that day at Ajax, nor realized how important BDCs were as an investment source in his district.

That has changed. Bringing laws for BDCs up-to-date has since become a key issue for Mulvaney, who is on the House Committee on Financial Services. He has proposed a draft bill to modernize the laws governing BDCs.

As a former small business owner himself, Mulvaney believes allowing BDCs to grow more easily, a key component of his proposed legislation, will provide much-needed financing to the mid-sized companies to which banks have cut lending since the credit crisis.

“BDCs fill a niche for companies too big to access their local banks, but too small to access public debt and equity markets. I am acutely aware of the importance of having capital for growth when you are running a company,” Mulvaney said.

Last week, the modernization of the laws governing BDCs was the subject of a hearing by the House Subcommittee on Capital Markets and Government Sponsored Enterprises. The hearing brought together titans of the BDC industry.

“The BDC industry is maturing, and growing in a meaningful way. They are beginning to realize they need to come together as a regulated industry and speak with a common voice,” said Brett Palmer, President of the Small Business Investor Alliance (SBIA).

“They are incredibly competitive, which is one of the challenges of getting them all in the same regulatory boat, rowing in the same direction.”

The timing of Prospect Capital’s purchase of Ajax Rolled Ring in April 2008 was not fortuitous. The company was heavily reliant on Caterpillar, which accounted for roughly 50% of revenue, and the global financial crisis took a heavy toll on Ajax in 2009 and 2010.

Still, Prospect Capital increased its investment in Ajax during those tough years. That investment allowed Ajax to build a machine shop, and thus deliver a more finished product to its customers. Last year, when Italy-based FOMAS unveiled an offer for Ajax in a bid to expand in the U.S. market, Ajax was a much stronger business with revenue diversified away from Caterpillar, according to Prospect Capital.

Rep. Mulvaney is hoping a bill could be ready at the end of July, and that it could be on the floor for debate by fall. The new draft of the bill addresses concerns raised over a prior proposal to reform BDC rules.

One size does not fit all
The SBIA estimated the number of active BDCs exceeds 80, and the size of the rapidly growing industry has surpassed $70 billion. “What’s a priority for one BDC is not necessarily a priority for another,” SBIA’s Palmer said.

Even with differences across the industry, possibly the most important potential change for BDCs is the asset coverage requirement. The change would effectively raise the leverage limit to a 2:1 debt-to-equity ratio, from the current 1:1 limit.

BDC managers argue that even with the change, leverage of BDCs would be conservative compared to other lenders, which can reach a level of 15:1, for banks, and even higher, to the low-20x, for hedge funds.

“It should allow BDCs to invest in lower-yielding, lower-risk assets that don’t currently fit their economic model,” Ares Capital Board Co-Chairman Michael Arougheti told the hearing. “In fact, the current asset coverage test actually forces BDCs to invest in riskier, higher-yielding securities in order to meet the dividend requirements of their shareholders.”

BDC managers say that BDCs are far more transparent than banks traditionally have been. After all, BDCs regularly publish their loans, as well as the loans’ interest rates and fair values, in quarterly disclosures with the Securities and Exchange Commission.

“We believe it would be good public policy to increase the lending capacity of BDCs, and promote the more heavily regulated, and more transparent, BDC model,” said Mike Gerber, an executive vice president at Franklin Square Capital Partners.

To garner support for the leverage change, the bill may require BDCs to give as much as a year’s notice for any increase, allowing shareholders to sell holdings before any change comes into effect, if they don’t approve.

However, the idea of “increasing leverage” has suffered a tarnished image with the public since the credit bubble and resulting global financial crisis. BDCs are popular with retail investors because of their high dividends.

Testimony of Professor J. Robert Brown, who was a Democratic witness at the June 16 hearing on BDC laws, could help repair this image problem, supporters of the change say. Brown said reducing the asset coverage for senior securities was an “appropriate” move toward giving BDCs more fundraising capacity.

“Such a change will potentially increase the risks associated with a BDC. Nonetheless, this is one area where adequate disclosure to investors appears to be a reasonable method of addressing the concern,” Brown’s published testimony said.

“In addition, the draft legislative proposal provides investors with an opportunity to exit the company before the new limits become applicable.”

Save paper
Another change under discussion is the definition of  “eligible portfolio company,” which dictates what type of companies BDCs can invest in.

BDCs were designed to furnish small developing and financially troubled businesses with capital. Existing rules dictate that BDCs invest at least 70% of total assets into “eligible portfolio companies,” leaving out many financial companies.

Some argue that the economy has changed since this BDC rule was put in place, moving away from traditional manufacturing companies.

“Changing the definition of eligible portfolio company to permit increased investment in financial firms may result in a reduction in the funds available to operating companies. It may also result in an increase in the cost of funds to operating companies,” Brown said in his published testimony.

Less controversial in a potential BDC modernization bill appears to be the desire to ease regulatory burdens for BDCs.

Main Street Capital CEO Vincent Foster drew attention to the SEC filing requirements born by even the smallest BDCs. He called for reform to the offering and registration rules, such as allowing BDCs to use “incorporation by reference” that would allow them to cite previous filings instead of repeating information in a new SEC filing. He said the change would not diminish investor protections.

By way of example, Foster held up a stack of papers at the hearing on the BDC bill, about four inches thick, that was needed by Main Street to issue $1.5 billion in stock. He then held up a stack of papers, less than one inch thick, needed by CIT, not a BDC, to allow for a $50 billion equity issuance.

“Do four more inches of paper protect better than a half an inch? Hundreds of pages represent wasted money and manpower,” Foster said.

“This discussion draft would fix this absurdity and make a host of clearly-needed reforms.” – Abby Latour

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Univar preps allocations on cross-border term debt

A Bank of America Merrill Lynch-led arranger group today firmed pricing on Univar’s U.S. dollar B term loan at the tight end of its L+325-350 range, while dropping a proposed MFN sunset provision from the cross-border transaction. All other terms are unchanged, and allocations are expected today, sources said.

The seven-year covenant-lite loan is split between $2.05 billion and €250 million tranches, priced at L/E+325, with a 1% floor, and offered at 99.5. The loans will include six months of 101 soft call protection. As finalized the loans will yield 4.41% to maturity.

BAML, Deutsche Bank, Goldman Sachs, J.P. Morgan, Wells Fargo, HSBC, SunTrust Robinson Humphrey, Morgan Stanley, Barclays, Citi and Credit Suisse are arranging the transaction.

The chemical concern, which is controlled by Clayton Dubilier & Rice and CVC last week priced its initial public offering of 35 million shares of common stock at $22 per share, the high end of a $20-22 range. The issuer also this week sold $400 million of 6.75% senior notes due 2023.

The company plans to use proceeds from the IPO and those from a concurrent private placement in part to redeem the all of its bonds. There is $600 million outstanding under its 2017 subordinated notes and $50 million outstanding under its 2018 subordinated notes, SEC filings show. With the IPO, the current sponsors’ ownership stake would be reduced to about 55.7% of the company’s common stock.

As of March 31, there was about $2.68 billion outstanding under the issuer’s covenant-lite dollar-denominated term loan and $136.5 million under its euro term loan, both of which mature in June 2017. The dollar tranche is priced at L+350, with a 1.5% LIBOR floor, while the euro loan is priced at E+375, with a 1.5% floor. In recent regulatory filings related to the proposed IPO, the company had indicated its plans to refinance its existing loans. – Chris Donnelly/Kerry Kantin


Hayfin Capital Management hires Moravek for U.K. origination

Private debt fund manager Hayfin Capital Management has hired Paul Moravek as a managing director in its U.K. origination team.

Moravek, who begins work at the firm next week, joins from VentureFounders, a U.K.-based equity crowdfunding platform which he co-founded in 2013.

Previously he worked in leveraged finance at Merrill Lynch for nine years, having joined in 2004 from J.P. Morgan.

Hayfin recently bid farewell to two managing directors: Paul Levy, who joined investment banking boutique GreensLedge, andRinaldo Olivari, who left to launch his own financial technology firm.

Jeff Sockwell, also a managing director and co-head of origination at the firm had earlier left the firm in May to the U.S. He continues to be an advisor to the firm.

The moves follow a recapitalisation at Hayfin whereby the firm sold the portfolio of owned assets to Australian sovereign wealth fund The Future Fund, one of its shareholders. Proceeds from the €705 million sale were used to fund a dividend to investors. In a statement at the time of the deal in May, Hayfin said it would continue to manage the assets on behalf of The Future Fund alongside other third-party funds and separate accounts. Hayfin reaffirmed its commitment to its role as a European direct lending platform and said it would look to expand it across Europe.

The firm’s management team increased their stake in the business following the recap, while the firm’s institutional backers – private equity group Towerbrook Capital Partners, The Public Sector Pension Investment Board, The Ontario Municipal Employees Retirement System (OMERS), and The Future Fund – reduced their shareholdings pro-rata. – Oliver Smiddy


Sequential Brands nets leveraged loan commitment for Martha Stewart buy

Sequential Brands disclosed that it has entered into a commitment letter with GSO Capital Partners that will make available two senior secured term loans totaling up to $300 million in connection with the company’s planned acquisition of Martha Stewart Living Omnimedia for roughly $350 million. The commitment letter also provides the option to provide up to an additional $60 million.

Under the terms of the acquisition, which has been approved by the boards of directors at both companies, Sequential Brands is planning to acquire Martha Stewart Living for $6.15 per share.

As reported, Sequential Brands in April entered into an amendment to provide for a $100 million A term loan and a new $69.5 million second-lien term loan in connection with the company’s acquisition of a majority stake in Jessica Simpson brand.

New York-based Sequential Brands owns, promotes, markets, and licenses a portfolio of consumer brands. The company’s acquisition of a majority stake in the Jessica Simpson brand includes the Jessica Simpson Collection master license and other rights. – Richard Kellerhals


Premier Dental Services downgraded to CCC+ after equity cure

S&P Ratings has downgraded Premier Dental Services’ corporate credit and senior secured debt ratings to CCC+, from B.

The ratings agency cited the company’s receipt of a sponsor equity cure and covenant pressure. Premier Dental’s EBITDA and free cash flow have weakened over the past two quarters, S&P said in a report published yesterday. Covenants, meanwhile, remain “extremely tight, and unless operating results improve significantly in the near term, covenants will remain under pressure.”

The downgrade also reflects the deterioration in the company’s operating margins and credit measures due to a challenging reimbursement environment in its core market, and its need to receive a $10.4 million equity cure from its sponsor to resolve an anticipated noncompliance with its financial covenant in the first quarter of 2015. Premier Dental’s highly leveraged finance risk profile incorporates S&P’s belief that leverage, which has increased to around 8-9x on an adjusted basis, will remain high over the next few months as the company seeks to improve margins and cash flows.

The recovery rating on the senior secured debt remains at 3.

Orange, Calif.-based Premier Dental and its affiliates operate about 190 dental care offices in California, Arizona, and Nevada. – Richard Kellerhals


Area Wide Protective nets $124.5M loan for buyout, led by GE Antares

GE Antares Capital was administrative agent on a $124.5 million senior credit facility backing a buyout of Area Wide Protective (AWP) by The Riverside Company.

Other lenders were Madison Capital, NewStar Financial, and MidCap Financial.

Audax Mezzanine provided mezzanine debt financing.

Middle-market private equity firm Blue Point Capital Partners, the seller in the transaction, has held the business since 2008.

Area Wide Protective, based in Kent, Ohio, is a provider of traffic-control services, offering professional work zone design and execution services in support of repair, maintenance, and construction activity affecting public infrastructure. The company has more than 1,800 employees and a fleet of nearly 900 trucks. AWP works out of 43 locations in 17 states throughout the U.S. Midwest, East, and Southeast. – Abby Latour/Jon Hemingway

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Fifth Street Finance sells healthcare direct lender to rival MidCap

Fifth Street Finance Corp. has sold Healthcare Finance Group (HFG) to MidCap Financial, a competitor to HFG in direct lending to the healthcare industry.

“We decided that it was important to refocus FSC on our core lending businesses, particularly middle market sponsor-backed lending as well as technology lending and aircraft leasing,” a Fifth Street Finance Corp. statement today said.

HFG provided asset-backed lending and term loan products to healthcare companies.

As of March 31, HFG was the largest holding of FSC’s portfolio, accounting for 4.3%. The HFG investment totaled $118 million at fair value. HFG is an operating company with a portfolio consisting of individual loans to some 40 companies.

FSC acquired HFG in June 2013.

Fifth Street Finance Corp. is a business-development company that trades on NASDAQ as FSC. It is managed by Fifth Street Management. – Abby Latour

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