Texon Issues High-Yield Bond

Over the past two years, the high-yield bond has established itself as a feature of the European financing landscape. The most recent issue completed was a DM245 million (ecu 124 million) note for Texon International, the world’s largest manufacturer of structural shoe materials.

The bond, offered by Chase Securities Inc, Chase Manhattan Bank AG and Chase Manhattan International, has a yield of 10% and a ten-year maturity. It ranks as the second largest Deutschmark-denominated high yield issue seen in Europe and the largest outstanding bond issue for a private equity backed company.

The bond was issued to fund the acquisition of the United Texon shoe materials operation by newco Texon International – effectively, a financial restructuring of the business.

United Texon, which originally comprised both the materials operation and a shoe manufacturing machinery business, was acquired in a buyout led by Apax Partners in the spring of 1995, which placed a gross value of over GBP130 million (ecu 196 million) on the company.

In December 1997, the machinery business was demerged into USM Group Holdings, leaving the materials business with United Texon, thus creating two independent companies majority owned by the same institutional shareholder group.

John Hart of Apax Partners explained the decision to separate the businesses reflected their very different natures: the machinery concern, a capital goods operation, is breaking even, whereas the materials side of Texon is a strong growth business which is continuing to gain market share and add capacity.

The original United Texon buyout was structured with GBP50 million of institutional equity, GBP70 million of senior and credit facilities, a mezzanine tranche and a deep discount bond; GBP58.6 million of these facilities were outstanding at the time of the acquisition by Texon International. John Hart said that the use of a substantial non-amortising instrument in the new funding structure would enable Texon International to reinvest in additional capacity and make a series of bolt-on acquisitions in Europe. He added that Texon International is also in a position to buy businesses in the Far East “on an opportunistic basis”.

Two of the original shareholders in United Texon, HSBC Private Equity and Kleinwort Benson Development Capital, who each held 8%, exited their investments as part of the restructuring. Their holdings were taken up pro rata by Apax Partners, which originally held 65% of the equity, and Chase Capital Partners, which started out with 8%. Phildrew Ventures and ECI Ventures, the remaining members of the original syndicate, have rolled their investments over into the new structure but did not take up their rights to the additional equity. Up to 10% of Texon International’s equity is available for management, with 8% having been issued to date.

Texon International is based in Leicester in the UK, with seven manufacturing sites in Europe, the US and China. Its primary products include materials for insoles, stiffeners and other shoe-related products such as linings, tacks, steel shanks and adhesives. Customers for these products include Nike, Adidas and all other major athletic footwear companies, together with leading producers of casual shoes including Timberland and R Griggs & Co, the manufacturer of the Dr Martens brand. In all, United Texon sells to more than 6,000 customers in over 90 countries worldwide and generated 1996 revenues totalling GBP128 million.

Apax director Tim Wright said “the high-yield bond issue provides a good financial structure which will allow us to invest in and grow the Texon business and we should be well positioned to consider flotation in a two to three year time frame”.