Saga recapitalisation has 100% equity takeout

Saga has launched a £500m add-on to finance a dividend recap by sponsor Charterhouse, via Bank of Scotland, Merrill Lynch and Mizuho Corporate Bank.

The additional debt will be split evenly between the B and C tranches, taking each to £380m. The proposed changes also include a 25bp margin reduction on the A, B and C tranches. Although no fees will be paid for the new money, all lenders will receive a 20bp consent fee for agreeing to the new debt terms and for approving the payment of a dividend to Charterhouse equal to 100% of the sponsor’s original equity stake. This equates to a significant portion of the capital structure as the original deal featured a 45% equity cushion.

The add-on would take leverage to 7.1x, up from the 6.5x on the original £1.045bn deal, which closed at the end of 2004 via leads Bank of Scotland, Merrill Lynch and Lehman Brothers. Although the equity withdrawal is high, earnings are reported to have grown by about 20% under Charterhouse’s tenure, meaning there is a significant amount of equity remaining in the deal.

The original deal was well received in the primary market, yet went on to struggle on its secondary debut, although the paper eventually settled above par. At the time of the original syndication the deal’s leverage was seen as a market test. Moreover, the complex nature of Saga’s business model meant that the high equity component and Saga’s cash generation were key factors in getting the deal through. How far the market’s view on these details has changed should become clear following the bank meeting, which was scheduled for the end of last week.

Post add-on, senior debt will comprise a £260m seven-year amortising term loan A at 200bp over Libor, a £380m eight-year term loan B at 250bp, a £380m nine-year term loan C at 300bp, an £80m seven-year cash collateral facility at 225bp and a £120m seven-year revolver at 225bp. Subordinated debt comprises a £250m 10-year warranted mezzanine tranche with a cash interest margin of 4.5% and a non-cash margin of 4% and a £75m 10-year one-month junior PIK facility.