Sponsor-Backed Debt Amendments Blasting Off

Instances of buyout-backed companies seeking covenant relief, credit extensions and other debt-related amendments so far in 2009 has approximately doubled compared to the same period last year as the prolonged economic downturn leaves many companies short of cash and at risk of default.

Sponsor-backed companies launched 60 amendments related to their LBO-related debt issuances between Jan. 1, 2009 and May 11, 2009, according to Standard & Poor’s Leveraged Commentary & Data. That’s a ballooning figure compared to 2008, when the ratings agency tracked only 31 such cases during the comparable period, and tallied a year-end total of just 75 proposed credit amendments by sponsor-backed companies.

When compared to the pace of new acquisitions, the increase in credit amendments takes on more significance. In the first quarter of 2009, U.S. buyout shops closed 120 deals and sought 43 credit amendments—a ratio of one credit amendment for every 2.8 completed acquisitions. Meanwhile, the first quarter of 2008 witnessed 253 consummated acquisitions and only 22 launched amendments—a ratio of one amendment for every 11.5 closed deals, according to data compiled by Buyouts and S&P.

Covenant relief has been the largest single reason for LBO-backed credit amendments so far this year, according to S&P’s data. Indeed, 24 of the 60 amendments, or 40 percent of the instances tracked by the ratings agency were launched in the hope of gaining respite from various credit agreement stipulations, such as minimum-debt-to-EBITDA ratios.

Among those that launched amendments to relax covenants related to leverage or interest coverage tests were Arrowhead General Insurance Agency, Inc, an insurance company backed by Spectrum Equity Investors; NCO Group Inc, a third-party manager of accounts receivable solutions owned by One Equity Partners; and Quality Home Brands, a provider of decorative lighting fixtures to the residential market that’s backed by Quad-C Management Inc.

Of course such amendments come at a price. A median spread increase of 225 basis points has accompanied credit amendments launched by sponsor-backed companies seeking covenant relief. Meantime, the median amendment fee for covenant relief was approximately 100 basis points, as of May 11.

Covenant relief aside, sponsor-backed companies sought a variety of other amendments as well. Some, such as Behrman Capital’s Pelican Products Inc. and Bain Capital’s HCA Inc., launched amendments allowing them to raise new debt under their existing capital structures. Pelican Products, a maker of high-end lighting systems received an amendment to raise $150 million in new mezzanine debt in order to acquire Hardigg Industries, a maker of plastic molded cases, for $200 million, while hospital operator HCA launched an amendment to issue new first-lien bonds in order to repay its first-lien term loans.

Other companies like American Achievement Corp., a maker of high school and college experiences through yearbooks and class rings owned by Fenway Partners, and Skilled Healthcare, a nursing home operator owned by Onex Partners, launched amendments to extend the life of their revolving credit facilities. In today’s market, which has been marred a lack of financing options, revolvers have become one of the precious few sources of cash available for many companies to tap in order to meet certain expenses.

Though the number of sponsor-backed amendments so far this year will far eclipse 2008’s count if the current pace keeps up, the actual percentage of amendments that are buyout-backed versus those of independent, non-sponsored companies could shape up to be about the same or even lower. As of May 11, S&P found a total of 191 credit amendments, of which 31 percent were sponsor-related. For full-year 2008, the ratings agency tracked a total of 205 credit amendments with approximately 37 percent being sponsor-related.