KKR’s Masonite Misses Interest Payment

Masonite International Inc., a portfolio company of Kohlberg Kravis Roberts & Co., has missed an interest payment related to its $770 million senior subordinated notes due 2015, raising questions about the solidity of KKR’s $551.5 investment in the company.

Masonite International said in a regulatory filing that it actually had enough cash on hand to make the Oct. 15 interest payment, but that it was blocked from doing so by holders of its senior secured debt as a result of broken financial covenants earlier this year. Masonite International has a grace period until Nov. 15 to make the payment on its senior subordinated notes before it is considered an interest payment default, according to a regulatory filing.

The maker of interior and exterior home doors has been hit hard by the combination of its highly-levered balance sheet and a housing market that’s been floundering for more than a year. Second-quarter sales at the Ontario, Canada-based company fell 13.8 percent to $507.8 million, down from $588.9 million in the same period in 2007. Adjusted EBITDA fell 43.5 percent to $56.0 million in second quarter, down from $99.1 million a year earlier. Net debt, meanwhile, stood at $2.0 billion as of June 30, up from $1.9 billion at the close of the first quarter.

KKR invested roughly $551.5 million of equity to acquire Masonite International in April 2005 for about $2.7 billion. The deal included a $1.2 billion senior secured term loan, a $350 million revolving credit facility, and $770 million in senior subordinated notes, according to a regulatory filing.

KKR reportedly also owns portions of Masonite International’s bank debt. If true, that would put the New York buyout firm on conflicting sides of any potential workout scenario. This isn’t the first time KKR has played on both sides of the balance sheet for one of its portfolio companies. Earlier this year KKR used its KKR Capital Markets division—a securities broker-dealer formed in 2007—to underwrite financing for the add-on acquisition of financial software provider GL Trade SA, now part of SunGard Data Systems.

In the second quarter, Masonite International fell out of compliance with financial covenants related to its senior secured debt. The covenant breach was related to EBITDA metrics that the company was unable to meet. Masonite International has forbearance agreements with senior secured lenders, which states that they will not take punitive actions, such as accelerating the maturity of the company’s revolving credit facility, forcing payment of obligations, or terminating the revolver altogether. However, the forbearance agreement is scheduled to expire on Nov. 13.

Masonite International’s debt was downgraded by ratings agencies following the missed payment. Standard & Poor’s lowered its rating on Masonite International to ‘D’ from ‘CC’, while Moody’s Investors Service notched its rating of the company down to Caa3 from Caa1.

Also weighing on Masonite International is the fact that a relatively small number of customers account for almost half of its sales. If that group struggles, so does the company. In 2007, Masonite International’s top 10 major customers accounted for about 43 percent of the company’s gross sales, while its largest customer accounted for approximately 19 percent of that year’s gross sales, according to a regulatory filing.