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Kinetic Concepts buyout to tap mezzanine debt to replace $900M bond

by Max Frumes | Published October 12, 2011 at 8:24 AM

Buyout target Kinetic Concepts Inc. expects to tap the mezzanine market instead of high-yield debt for the remaining $900 million in financing it needs for its $6.3 billion buyout by an investment group, according to sources familiar with the financing.

The San Antonio medical device maker originally planned to issue $900 million of unsecured bonds as part of a $2.55 billion notes offering. Kinetic will use the debt to finance its $6.3 billion acquisition by Apax Partners LLP, Canadian Pension Plan Investment Board and the Public Sector Pension Investment Board.

On Oct. 7, Moody's Investors Service rated that proposed tranche a very high credit risk, at Caa1, and pegged its loss-given-default measure at 92%.

On Monday, however, Standard & Poor's Leveraged Commentary & Data said the bond offering was no longer coming to market along with the senior secured notes, which are due Thursday. If Kinetic does decide to do a formal road show for the unsecured bonds, it would take place Oct. 18, according to a source.

This means that the banks providing the bridge financing -- Morgan Stanley, Bank of America Merrill Lynch, Credit Suisse Group and Royal Bank of Canada -- will still be looking to offload the bridge loan backing those notes.
The bridge loan is priced at a steep LIBOR plus 850 basis points, with a 1.5% floor, which will increase by 50 basis points per quarter, according to LCD.

Private equity firms continue to struggle to find adequate and appropriately priced financing necessary to juice their returns in leveraged buyouts. The deals that were agreed upon before the U.S. debt downgrade, such as Kinetic Concepts, have resulted in losses for the banks involved.

This, in turn, has caused them to take precautions in subsequent financings while trying to find a way to structure pending transactions that the market will buy.

"It's fair to say that when your corporate family is a B2, you're kind of looking for the most opportunistic way to finance your capital structure," according to Moody's leveraged loan analyst Christina Padgett. "Most companies like unsecured debt because they don't have to pledge their collateral."

But Padgett said a company as highly levered as Kinetic has to pledge a lot more collateral and put these notes in a highly subordinated position to where there's really not much that would be left in a bankruptcy scenario.

Other buyouts have also relied on mezzanine recently. Blackstone Group LP's $3 billion buyout of Emdeon Inc., the healthcare management company, will include mezzanine, according to a source familiar with the deal. Bain Capital LLC and Hellman & Friedman LLC's $3.2 billion buyout of Swedish alarm business Securitas AB needed to get €393.5 million ($567.4 million) of mezzanine loans after it had trouble taking out a bridge loan with bonds. Morgan Stanley also arranged that loan, the largest mezzanine deal in Europe to date.

Before news leaked of Kinetic's bond shortfall, it had already announced that Bank of America Merrill Lynch, Morgan Stanley, Credit Suisse and RBC Capital Markets were moving $400 million on Kinetic's planned $2.6 billion term loan to the second-lien high-yield bond issue.

The loans now consist of a $2.2 billion, seven-year term loan and $200 million five-year revolver, and came to market at LIBOR plus 575 basis points, with a 1.25% floor, a 95.5-96 offer price and 102, 101 soft-call premiums, according to LCD.

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Kinetic Concepts buyout to tap mezzanine debt to replace $900M bond

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