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Kraton Polymers launched an unusual non-amendment amendment this week in an effort to build the case for its long-shot IPO, reports Debtwire. The Houston-based chemicals company announced on 1 October its plans to sell new equity despite the deep discount priced into its bonds and a sharp deterioration of EBITDA in 1H09.
The company is offering lenders a 10bps fee in a good-faith gesture aimed at currying their favor should it launch an amend-and-extend proposal in the future, said two lenders and a source familiar with the situation. Acceptance of the fee would be non-binding concerning any future amendments but management hopes it will convince potential equity investors that lenders will be flexible about pushing back the credit agreement maturity.
The company’s USD 75m Libor+ 250bps revolver matures May 2011 and its USD 323m L+ 200bps term loan matures May 2013.
Kraton held a call Tuesday with lenders to pitch the UBS-led proposal and signatures are due tomorrow (16 October), the lenders said. The TLB was quoted 94.75-96.35 yesterday, up from 86.80-88.80 before the announcement of the planned IPO, according to Markit. Kraton’s USD 170m 8.125% senior notes due 2014 traded in an odd lot at 78 to yield 15.3% on 1 October, up from 69.625 to yield 18.745% on 30 September, according to MarketAxess.
Kraton announced 1 October plans to raise as much as USD 230m through an equity offering to help pay down indebtedness and fund capex. Per its senior secured credit agreement, Kraton is required to apply a minimum of 50% of the net IPO proceeds toward debt reduction on its term loan, said Standard & Poor’s in a report putting the B- rated company on credit watch positive.
Kraton did not shed much light on the terms of the IPO during the call but implied that its launch is not imminent, said one of the lenders. Kraton still needs comment from the SEC, and to file another S-1 before proceeding, he said.
Lenders are basically giving up nothing for receiving the 10bps, so the offer isn’t that hard of a sell, but the company does face some scrutiny, said the sources. “I would rather they just do the IPO, pay us down, and then refi the deal later,” said the first lender. “Problem is for lenders, doing it this way means they might not be extending the whole term loan and revolver, which will make it less liquid,” he said.
Kraton generated EBITDA of USD 23m in 1H09, down from USD 51m in 1H08, the lender added. A 2.75x interest coverage test steps up to 3x in 1Q10, and a total leverage test of 4.45x steps to 4x in 4Q09, but the company has indicated it wouldn’t trip this fiscal year, he said.
Kraton’s indirect sponsors are TPG Capital and JPMorgan Chase’s private equity firm. TPG and JP Morgan Partners bought Kraton in 2003. The USD 770m deal included a USD 250m equity injection from the PE shops. In 4Q07, the sponsor group injected a USD 10m of additional equity to cure a covenant trip. Subsequently, Kraton was able to avoid further trips in 1H09 when it bought back USD 37m of bonds at a discount in the secondary market.
CFO Stephen E. Tremblay declined comment.
Bank and sponsor officials did not return requests.
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