S.F. Firm Relies On Pre-Negotiated Financing For Pair Of Add-Ons

This is why it pays to think ahead.

Gryphon Investors was recently able to complete two add-on acquisitions for one of its portfolio companies, thanks in large part to a financing agreement it signed with its lenders at the time of the initial platform acquisition. The portfolio company, Chicago-based Accelerated Rehabilitation Centers, an operator of physical therapy centers, has recapitalized both PRORehab P.C., a group of 19 clinics in the St. Louis, Mo., area; and Therapy Services of Iowa, a group of four clinics in the Des Moines, Iowa, region.

The San Francisco-based firm, which concentrates on the lower middle market, originally bought Accelerated Rehabilitation Centers in March 2008, simultaneously purchasing OccuSport Physical Therapy, another Chicago-based group of physical therapy clinics, at that time. As part of the deal, Gryphon Investors got its lenders to agree to provide senior and mezzanine debt for future acquisitions by the platform at fixed interest rates. The lenders are Orix Corp., Madison Capital Management, and Fifth Third Bancorp on the senior side; and New York Life Insurance Co. and Thrivent Financial for Lutherans on the mezzanine.

Even though the financing environment was already difficult in March, John Rogers, a principal with Gryphon Investors, told Buyouts the pre-existing lending arrangement was key in getting these deals done. He declined to discuss the rates on the debt, but said the terms would have been worse had Gryphon Investors needed to go out to raise a new debt package in the current market. Gryphon Investors also didn’t disclose the price of the individual add-ons, but Rogers said the transactions had a combined worth of less than $50 million, and that Gryphon Investors financed the purchases with about two-thirds debt. That’s a healthy amount of leverage in today’s market, when many buyout firms are financing deals with 50 percent equity, sometimes even doing straight equity deals.

With PRORehab and Therapy Services of Iowa in the fold, Accelerated Rehabilitation now owns and manages more than 165 physical therapy centers in seven states. Founded in 1989, Accelerated Rehabilitation specializes in orthopedic and sports rehabilitation, as well as hand therapy, rehabilitation for work-related injuries, and women’s health. It also offers rehabilitation services to nursing homes, long-term care facilities and home care providers, and athletic training services to schools and athletic clubs.

Management at Accelerated Rehabilitation has had its eye on the targets since before Gryphon Investors even bought the company, Rogers said. The firm and the management team are currently in negotiations with a number of other potential add-ons, Rogers said, but they’ll have to secure new financing. The amount of leverage needed for the PRORehab and Therapy Services of Iowa deals exceeded the amount of pre-negotiated capital.

These latest add-ons come out of Gryphon Partners III LP. The firm closed the fund at $415 million back in 2006, and then, in January 2008, raised a $100 million supplement to the fund. The firm has had some success in the health care arena, scoring an IRR of 40 percent on its sale of Nursefinders, an Arlington, Texas-based health care staffing services provider, to a unit of Goldman Sachs in 2007, according to the previous Buyouts report. Its three core sectors, however, are business services, consumer and retail, and general industry.