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— Capital Calls —
The drop in consumer demand has battered mattress retailers, and several have gone bust in this cycle, including Comfort Co. of West Long Branch, N.J., a portfolio company of Catterton Partners. Even Sealy rival Simmons Co., which Boston buyout shop Thomas H. Lee Partners LP owns, is struggling, operating under forbearance agreements with lenders after missing an interest payment.
Sealy, the world's largest, has been picking up market share, its executives say, but it isn't immune. In January, it reported a fourth-quarter loss that it blamed on raw-materials costs and the deepening economic recession. Its financials continued to deteriorate in the first quarter of this year despite significant cost cuts. KKR wanted to put the company on more solid ground with new equity, but the firm, which acquired the Trinity, N.C., company in April 2004 for $1.5 billion, felt it needed an appropriate mechanism that protected its downside while being fair to existing minority shareholders, according to a source. In May, Sealy and its advisers drafted a comprehensive plan to refinance its senior secured credit facilities and replace them with longer-maturing debt with no quarterly maintenance covenants. Sealy plans to raise $177 million of senior secured convertible pay-in-kind notes due 2016, convertible into shares of Sealy common stock. KKR pledged to exercise all its rights amounting to about $90 million and cover any unsubscribed notes. The PIK notes, bearing an 8% coupon, may be immediately converted into shares at $1 per share. "It's a creative way to balance various considerations," says Martin Nussbaum, a partner at Dechert LLP who has advised on other rights offerings. If a sponsor puts in new equity, all the debt that would otherwise be trading at a discount rises in value -- something Sealy sought to avoid in case it needs to negotiate a debt repurchase. Nussbaum believes Sealy's idea will likely catch on: "I wouldn't be surprised to see more of this." At least three portfolio companies have issued dividends to their sponsors. These weren't sizable, but they're rare relics of a buyout era gone bust. New York buyout shop Wellspring Capital Management LLC raked in $40 million in a dividend-paying recapitalization of St. Louis trade college Vatterott Educational Centers Inc., Standard & Poor's Leveraged Commentary & Data said May 28. LCD said Vatterott recently closed a financing with a $20 million revolver and a $70 million term loan led by GE Capital Corp. Lenders included Bank of America Corp., KeyBanc Capital Markets Inc., Ares Capital Management LLC and Madison Capital Management LLC. Wellspring purchased Vatterott in a deal valued at $105 million before expenses in January 2003, sources said at the time. Wellspring declined comment. Also in May, midmarket private equity firm PNC Equity Partners said a dividend recap of Griffith Energy Inc., a Rochester, N.Y., distributor of propane and heating oil, yielded a 1.5 times return on its initial investment. Manufacturers and Traders Trust Co. led the senior debt. PNC, the PE arm managed by an affiliate of PNC Financial Services Group Inc., still owns a majority of the company. Griffith Energy serves more than 100,000 residential customers in New York. In February, pipeline operator Kinder Morgan Inc., owned by Goldman Sachs Capital Partners, Carlyle Group, Riverstone Holdings LLC and American International Group Inc. affiliates, awarded its sponsors a $50 million cash dividend for the first time since the $21.8 billion buyout in 2007. It gave no explanation in its first-quarter results. Independent ratings firm CreditSights Inc., which flagged the payout, says the PE backers are sitting on a "very conservative" 40% return on equity. CreditSights warns that the sponsors may ultimately find it difficult to exit through a trade sale, since Kinder Morgan is already among the largest pipeline operators in North America. Still, it's not a bad multiple in a tough market. Christine Idzelis contributed to this article. |
Losing sleep over painful portfolio company restructurings? Try mattress maker Sealy Corp.'s unconventional rights offering, designed to give the company more cushion to ride out the recession. Backstopped by majority shareholder Kohlberg Kravis Roberts & Co., the offering was structured as senior secured convertible notes, a departure from the common shares typically handed out in the smattering of rights offerings in the U.S. so far. As restructurings continue to roil heavily leveraged companies desperate for new capital, this appeared to be an elegant, defensive move that others may well emulate. 
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