Recent Debt Buybacks Catch Eye Of Ratings Agencies

More than a month after deleveraging its balance sheet through a debt buyback, Standard & Poor’s has upgraded the corporate credit rating of Synagro Technologies Inc., a water treatment company owned by The Carlyle Group, to ‘CCC+’ from ‘SD’, or selective default. Meanwhile, Dana Holding Corp., a supplier of auto components that’s backed by Centerbridge Capital Partners, saw its corporate family rating cut by Moody’s Investor Service to ‘Caa2’ from ‘Caa1’ on the heels of its own debt repurchase.

Enticed by discounts on the loan secondary market and the prospect of a deleveraged company, buyout-backed businesses have been purchasing and retiring their own debt to mitigate the corrosive affects of macroeconomic decline on their balance sheets. In addition to the two listed above, companies backed by firms like Apollo Management, The Blackstone Group and CI Capital Partners have also invested in their own debt since the economy took its downward turn.

In late April, The Carlyle Group’s Synagro Technologies purchased and retired about $35 million of its $150 million second-lien loan for a cash consideration of approximately $14 million, or 40 cents on the dollar. The steep discount to par spurred S&P to consider the buyback a distressed exchange, prompting the ratings agency to slash the Houston-based wastewater management company’s credit rating two notches to ‘SD’ from ‘CC’.

Indeed, while the buyback may have been a good one for Synagro Technologies, there’s no question that some long-term investors in the company’s debt lost out big. In late March 2007, when the second-lien tranche first began trading on the secondary market, the credit traded above par in the 100.5 to 101 range, according to Thomson Reuters LPC.

The company’s upgrade by S&P on June 5, however, takes into account the additional headroom to the covenants and the reduction of interest expense that resulted from the buyback.

Concerns at the ratings agency, however, do remain around Synagro Technlogies’s ability to maintain covenant cushions and liquidity through the coming year, as the changes to the company’s capital structure from the buyback “are relatively minor given the company’s large debt levels,” S&P said.

The Carlyle Group penned its deal to take Synagro Technologies private in January 2007 for $5.76 per share, or $772 million, including the assumption of debt. Carlyle’s $277 million equity slug for the deal was the firm’s first investment from its Carlyle Infrastructure Partners Fund, a $1.15 billion vehicle dedicated primarily to transportation and water infrastructure projects in the United States and Canada.

Elsewhere on June 5, Dana Holding Corp, a supplier of axles, driveshafts and other components used in consumer, commercial and off-highway vehicles, received a one-step downgrade to Caa2 from Caa1 from Moody’s following that company’s own debt buyback.

Dana Holding, which is minority-owned by Centerbridge Capital Partners, repurchased less than 10 percent of its $1.26 billion term loan at a price of between 40 cents and 44 cents on the dollar. Despite it’s deleveraging, Moody’s believes the “ongoing difficulties in the global automotive and commercial vehicle industries will continue to negatively affect Dana’s credit metrics and pressure the liquidity levels.”

The Big Three auto makers—Ford, General Motors, and Chrysler—represent about 26 percent of Dana Holding’s revenues. The bankruptcy filings of the latter two are bound to exacerbate the problem.

Dana Holding, an NYSE-listed company, generated net sales of $1.2 billion in the first quarter ended March 31, compared to $2.3 billion in the same quarter the year before. The company’s net loss in that three-month period weighed in at $160 million compared to net income of $663 million in the comparable period in 2008.

New York’s Centerbridge Capital came to own a significant minority interest in Dana Holding after it led a $790 million investment in the auto component supplier to help it emerge from Chapter 11 bankruptcy protection in February 2008.