October 28, 2013 3:52 pm

Sorenson taps Moelis and Kirkland to lead restructuring

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Sorenson Communications has brought on board legal counsel Kirkland & Ellis and financial advisor Moelis & Co to help management negotiate a balance sheet restructuring, two sources familiar with the matter tell Debtwire.

The GTCR-owned company, which provides telecommunications services to the hearing-impaired, is under the gun to address a looming maturity on its bank debt at a time when revenue is expected to take a hit, the sources continued.

Sorenson’s earnings are based on reimbursement rates set by the Federal Communications Commission (FCC), which recently announced industry wide rate cuts. The company has an upcoming maturity in October 2014 on its USD 550m Libor+ 825bps (1.25% floor) term loan followed by the February 2015 due date on its USD 735m 10.5% second lien notes.

Given the adverse regulatory environment and the projected downward trend in earnings, some market participants are concerned about the company’s ability to refinance the loan and also address the bonds the following year. For their part, an ad hoc group of second lien lenders has coalesce with legal counsel Akin Gump and advisor Houlihan Lokey, the sources said.

Sorenson reported USD 45.2m in 2Q13 EBITDA, bringing LTM EBITDA as of 30 June to USD 216m. That sets leverage at 5.9x based on USD 1.28bn in debt. The 2Q13 EBITDA is 18% lower than the amount booked in 2Q11 and 9% lower than USD 49.8m booked in 1Q13, as Debtwire has previously reported.

Sorenson had USD 79.8m of cash on hand as of 30 June, down from USD 106m at 1Q13 end. The company has full availability under its USD 25m L+ 400bps revolver due 2014. The second lien notes were downgraded by Standard & Poor’s Ratings Services to ‘CCC’ from ‘B-’ on 16 September, reflecting the company’s high leverage and weak liquidity.

The recent VRS reimbursement rate reduction by the FCC represents a substantial decrease to the company’s future revenue stream and will likely result in negative discretionary cash flow for the foreseeable future.

The FCC recently set first-tier rates at USD 5.98 per minute from July to December 2013 and USD 5.75 per minute from January to June 2014 for the first 500,000 minutes per month. The per-minute rate for more than 500,000 minutes was set at USD 4.82 for FY13/FY14 compared to the prior USD 5.07 per minute, while the third-tier per-minute rate for more than one million minutes was reset to USD 4.63 from January to June 2014.

S&P has also raised questions regarding the growth of Sorenson’s Caption Call business, given how increased competition and a recent FCC ruling “have impacted the marketing practices and functionality of this service”, according to the report.

The second lien notes are quoted at 71/72, and the USD 550m L+ 825bps (1.25% floor) term loan is quoted at 100.5/101.

Moelis declined to comment. Calls to the company, Kirkland, Houlihan, Akin Gump and Sorenson were not returned.

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