Morton’s Cuts Revolver, Gets Covenant Relief

Morton’s Restaurant Group, a publicly-traded portfolio company of Castle Harlan Inc., has amended its revolving credit line with Wachovia Bank in a deal that both loosens financial covenants and reduces the borrowing capacity of the high-end steakhouse operator.

The March 4 credit amendment revises a financial covenant to make it less restrictive by changing provisions related to how certain covenant calculations are made. It also reduces the annual maximum consolidated capital expenditures the company can make.

With the covenant reduction, the size of Morton’s revolving credit facility was reduced to $75 million from $115 million. A further reduction to $70 million is slated for Dec. 31, 2009.

According to the loan agreement, Morton’s maximum adjusted leverage ratio through Oct. 4, 2009 is 5.5X. After that, it steps down to 5.25X. Increases in the interest rates and certain fees were also made.

The amendment also includes a new pricing grid based that corresponds to Morton’s leverage ratios. Assuming the company’s leverage ratio is below 4.5X, then pricing will be LIBOR plus 250 basis points. If the leverage ration is greater than or equal to 4.5X but less than 5X, pricing will be LIBOR plus 300 basis points. Once leverage reaches 5.0X or more, pricing will be LIBOR plus 350 basis points. The commitment fee at each of those leverage levels is 35 basis points, 50 basis points and 50 basis points, respectively

No reason was listed as to why the company pursued the credit amendment, but like many companies that rely on the spending of discretionary consumer income, Morton’s has taken a hit. For the nine months ended Sept. 28, 2008, Morton’s reported a net loss of $59.6 million compared to net income of $6.5 million for the same period the year before.

As of Feb. 23, the company owned and operated 80 Morton’s steakhouses located in 69 cities in 28 states, and in Puerto Rico and five international locations (Hong Kong, Macau, Singapore, Toronto and Vancouver), as well as three Italian restaurants.

Castle Harlan reportedly acquired Morton’s for about $71.2 million ($17 per share) in 2002 after a protracted bidding war for the restaurant chain with billionaire financier Carl Icahn. The buyout shop reportedly increased its bid for the company no fewer than four times because of bids by Icahn. The investment came from Castle Harlan’s third fund.

The partial exit came in 2006 amidst an IPO market hungry for new companies. The chain sold 9.5 million shares at $17 a piece—well above its expected range of $14 to $16 a share—for a total of $161.5 million .

Castle Harlan now owns approximately 29.1 percent of the Morton’s outstanding shares. At press time, Morton’s shares, which are listed on the New York Stock Exchange under ticker symbol ‘MRT,’ were trading below $2—a decline of nearly 90 percent from its IPO price—with a 52-week high of $8.70 achieved last May.

Morton’s is a portfolio company in Castle Harlan Partners III LP, which closed in 1997 on about $630 million. Castle Harlan is currently raising Castle Harlan V LP, which is less than half way to its $1.5 billion target after more than a year of marketing the fund.