Coinmach LBO gone wrong washes out sponsor

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

--------------------------------------------------------------------------------------------------------

Coinmach Services Corp may run a coin-operated cash cow, but like many casualties of the LBO craze, the company is struggling to cover its debts, Debtwire reports. Add a sponsor in the throes of its own liquidation – Babcock & Brown – to the mix and a workout starts to look inevitable.

The strangest twist in this LBO gone wrong is that its underwriters – Deutsche Bank and RBS – also arranged loans to Babcock & Brown. The banks ended up doubly exposed to the sponsor when they were stuck with much of the USD 1.2bn backing Coinmach’s acquisition in 2007.

Now the underwriters may end up with the keys to the portfolio company. Coinmach’s loan holders are angling toward a debt-for-equity swap following the company’s receipt of a going concern qualification, said an investor and two sellside sources.

Deutsche Bank and Babcock & Brown declined to comment for this article. RBS and Coinmach did not return requests for comment.

Cash flow washed out

Coinmach boasts a countercyclical business model that even a utility would be proud of. The company reported roughly USD 150m-USD 160m of LTM EBITDA at 1Q09, down only 8% since 4Q07 despite the macroeconomic carnage of the past year, said a source familiar with the matter and the investor. Nevertheless, the washing machine operator’s mountain of debt dwarfs its operating cash flow.

Babcock & Brown and RBS bought Coinmach in late 2007 for USD 1.3bn through a top-of-the-market LBO. Deutsche Bank and RBS agreed to provide USD 1.225bn of debt to fund the transaction, most of which was hung when the deal closed and remains in the underwriters hands, said the investor and the first sellside source.

Coinmach’s current capital structure eats away at its cash, the sources said. “It’s one of those credits that just doesn’t look like it can ever de-lever based on its own cash flow,” said one of the sources.

The company’s debt load comprises a USD 725m term loan B, a USD 50m delayed draw term loan - both due in 2012 - and a USD 50m revolver due 2013. It also includes a USD 175m senior unsecured loan and a USD 225m senior subordinated loan, both due 2015.

As of 1Q09, Coinmach reported USD 64m in cash, after having drawn down the delayed-draw TL during 4Q08, said one of the sources. The company typically has high capital expenditure related to facilities maintenance, and its USD 225m sub loan just switched over to cash-pay after having been paid-in-kind through May 2009.

Assuming EBITDA in the USD 155m range, Coinmach’s leverage as of 1Q09 was right at the 8x cap required by its credit agreement. However, based on bank adjusted EBITDA the company slipped under the cap for 1Q, one of the sources noted. The ratio steps down by 0.1x each quarter, according to Standard & Poor’s, which downgraded the credit to B- from B today..

A going concern?

Doubts about Coinmach’s covenant headroom prompted auditor Ernst & Young to issue the company a going concern notice, said the investor. While a going concern opinion is typically considered a technical default under a credit agreement, Coinmach and agent Deutsche Bank have informed lenders that the qualification does not constitute a violation, three of the sources said.

The bank stated that the qualification is “not expressly prohibited in the credit agreement,” they specified. A spokesperson for Ernst & Young declined to comment.

If the going concern qualification does not provide a trigger for negotiations with lenders, a covenant breach will likely become the trigger, said the first source familiar and a second source familiar with the situation. The Libor +300bps TLB is now quoted in the low- to mid-80s, compared with the mid-70s two weeks ago, two of the sources said.

Sponsor expects equitization

Further complicating matters, Babcock & Brown Limited filed for administration in Australia on 13 March. The operating subsidiary that houses most of the PE’s assets, including Coinmach’s equity, is Babcock & Brown International (BBI).

BBI is not currently in bankruptcy or administration, but agreed with its banking syndicate in January to sell down all its assets within a two-to-three year time period, according to press releases.

The sponsor is not holding an auction process to sell Coinmach and expects to exit the investment through a debt for equity restructuring, said a person familiar with the matter. Babcock & Brown also has no plans to provide the company with additional capital, the person added.

“The equity is out of the picture, for all intents and purposes,” speculated one of the sources. “They are not going to fight lenders in a restructuring.”

The ultimate result of B&B’s portfolio sell-down remains unknown right now, sources noted. There’s always a chance that a new equity owner could trigger the change-of-control clause, one source noted.

--------------------------------------------------------------------------------------------------------

For more information or to inquire about a trial please email sales@debtwire.com or call Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731