Under the proposed out-of-court restructuring presented on May 15, Centerbridge will swap about $225 million worth of unsecured debt in return for a 47% equity stake, according to court documents. Centerbridge will pay $100 million in cash, which will be used to pay down the first-lien debt, a majority of which is held by Angelo, Gordon & Co. This will give Centerbridge an additional 51% equity stake, or a total 98%, according to the lawsuit filed May 31 in the New York State Supreme Court in Manhattan.
The recapitalization allows the Rosemont, Ill., water treatment products supplier to avoid bankruptcy, two sources said. Culligan's debt will be reduced to $355 million, from about $765 million, the sources added. Current equity holders will receive only 2.25% of the equity in the restructured company; this means the Culligan dealers, about 300 of whom jointly own 7.5% of Culligan stock, will be left with 0.16% of the stock.
About 50 of the dealers are plaintiffs in a suit in the complaint, which portrayed CD&R's actions following a $650 million leveraged buyout of the company in 2004 as asset stripping, burdening it with debt "to the benefit" of the sponsor. The suit accused CD&R of fraudulent conveyance when it issued a repayment of capital and a stock dividend in addition to "exorbitant consulting fees" of $15 million.
The suit alleged that the transfer of ownership is part of a larger pattern of behavior whereby the defendants, which include CD&R and its principals, Centerbridge and Angelo Gordon, among others, breached their fiduciary duties in order to enrich themselves.
CD&R, in a published statement, said the claims are baseless.
Culligan, a 75-year-old company, had seen better times. The company, best known for its advertising slogan "Hey, Culligan man!" provides products such as water softeners and filters to households and commercial and industrial enterprises in about 90 countries. It was profitable, with about 15% Ebitda margins, when CD&R bought it, but it also had a history of rocky relationships with franchisees.
In 2010 the company generated about $640 million of net revenue, according to Moody's Investors Services in May 2011. At the time Moody's said the company was leveraged at 15 times, and the agency anticipated a "distressed exchange, bankruptcy or payment default over then next 18 months."
Standard & Poor's in May 2012 concurred, saying the company was leveraged 15 times for the 12 months ended March 31, 2011. At the time S&P said Culligan had $790 million of outstanding debt, including a $110 million revolving credit facility maturing in May 2012, a first-lien term loan, valued at $543 million and maturing in November 2012, and a second-lien, $248 million term loan due May 2013.
The private equity firms are now likely to gain control of Culligan at a discount, according to S&P, which withdrew its company rating last week after it downgraded the company's corporate debt rating to CC.
"Our rating actions follow Culligan's proposal to its lenders to exchange its existing first- and second-lien term loans for a combination of new loans, cash, and equity at a total consideration of less than 100% of principal plus accrued interest."
By May 2010 Centerbridge held 92% of the senior unsecured debt, after paying 44 cents on the dollar, and Angelo Gordon amassed almost 82% of the senior secured debt, paying 71 cents on the dollar, according to the law suit. Under the new deal, the $355 million of debt will be divided into two tranches of $175 million, one tranche due in five years and the other tranche due in six years, according to the lawsuit. The interest rate on the outstanding debt will be about LIBOR plus 8% rather than LIBOR plus 4.75%, according to the lawsuit.
In 2004, CD&R, which invested about $200 million of equity in the LBO, said it planned to create better alignment and improve relations with the dealerships. It isn't clear to what extent it was successful.
The company has had 21 owners in 35 years, according to the complaint. The complaint alleged that CD&R "fired many employees, sold off assets, including manufacturing facilities, including its Northbrook Illinois manufacturing facility, and outsourced manufacturing process to oversees suppliers."
CD&R, in its official response, said it "improved North American manufacturing with lower costs and improved quality; revitalized product portfolio through R&D investments; rebuilt the North America Commercial & Industrial business; streamlined business through non-core asset divestitures and the refranchising of North American company-owned dealers."
The private equity firm's stumbling block seemed to stem from a $900 million debt-financed recapitalization that the company completed in March 2007 at the height of the boom market and just before the financial crisis. Proceeds were used to redeem existing debt and pay equity holders a $360 million dividend recapitalization, according to Moody's, which at the time said the company was levered at about 7times.
Most of the dividend went to CD&R. However, $30 million of that went to franchisees, according to CD&R's written response.
CD&R commented, "The actions by Culligan and its board leading up to the 2007 dividend were entirely fair and proper from a business and legal perspectives confirmed by the independent review undertaken by the Company's outside legal counsel. The plaintiffs received their fair share of the dividend without objection over five years ago and we see no basis for second-guessing Culligan's judgment in the context of today's economic environment."
The lawsuit claimed that the debt burden was "insurmountable" and "the company had no reasonable prospect of surviving."
The plantiffs further argued that without the additional debt burden from the recap, "Culligan could have fully amortized and paid all its LBO debt out of operating cash, and be completely debt-free today."
CD&R contends the company remains poised for future growth.
Centerbridge declined to comment for this story, as did Culligan. Angelo Gordon did not return calls for comment.
Mayer Brown LLP hires Lawrence V. Berkovich as a partner in the banking and finance practice, amid "rapid growth of the CLO market." For other updates launch today's Movers & shakers slideshow.
The firm's Daniel Bonoff discusses the difficult environment for finding quality targets, but welcomes a hot market for issuers. More video