Turnaround Firm Continues Mastery Of Recaps

The latest recap, announced March 26, was funded by a combination of increasing the company’s term loan by $50 million, cash on hand and the company’s asset-based revolving credit facility, according to the firm. The proceeds funded a $70 million cash distribution to majority owner KPS Capital and other minority investors including MC Capital Inc.

When it comes to dividend recaps, KPS Capital is one of the more prolific sponsors. Around this time last year, HHI Group completed a $425 million recap which funded a $100 million cash payout to shareholders and, all in all, the company has distributed $418.8 to stockholders under KPS Capital, according to the firm.

In another example, the firm completed two recaps of adult incontinence product maker Attends Healthcare Inc. that included cash distributions of $35 million and $60 million, respectively, before finally selling the company and generating a total multiple of 15x return on its invested capital. Since August 2010, KPS Capital has also completed its second recapitalization of American Breweries Inc., and a recap of Global Brass and Copper Inc.

Dividend recapitalizations are often criticized for weakening companies in the name of generating returns for the private equity firm and its investors. In one notorious case that’s been given press again lately due to Mitt Romney’s presidential bid, his firm Bain Capital LLC was sued over squeezing an $83 million dividend out of KB Toys before its 2004 bankruptcy.

But KPS Capital made sure to note in its announcement that the Royal Oak, Mich.-based company, which is still 100 percent owned by KPS Capital and other investors, is “conservatively leveraged.” The source went on to clarify that the company is now leveraged at less than 3x its EBITDA. The source declined to provide the EBITDA. And there are valid arguments to be made that dividend recaps can be a positive for sponsors and the company.

HHI Group makes highly engineered parts used in power train applications, as well as wheel bearings and engine timing drive systems, among other products. The company employs more than 3,000 across 15 manufacturing facilities in Arkansas, Illinois, Indiana, Michigan and Ohio, according to KPS Capital.

It’s unclear how much KPS Capital invested in the company. According to Capital IQ, KPS Capital bought the company, then called Jernberg Industries Inc., out of bankruptcy in September 2005.