Please email ft@debtwire.com or call us at Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731 for further information on Debtwire and how to receive more articles like the one below.
--------------------------------------------------------------------------------------------------------
Holders of Focus’ GBP 100m 9.375% mezzanine notes due 2015 could make a credit bid for UK-based DIY retailer, two sources familiar with the matter said. Focus DIY’s private equity owners Duke Street Capital and Apax Partners hired Rothschild earlier this year to advise on a potential sale.
A credit bid would potentially help the mezz noteholders use their claims against the company as acquisition currency in a sales process. Houlihan Lokey is acting as a financial advisor to the group of mezz lenders. The 9.375% mezz notes were recently quoted around 50-55, according to a market participant.
Rothschilds has submitted the information memorandum to potential buyers, but has not set a date for first round bids, one of the sources familiar. This is because the due diligence process is still ongoing, according to the source.
The company has received indications of interest from several parties and is in discussions with a wide range of them, both sources said. The sales process will pick up by the end of March and a shortlist of preferred bidders should be finalized by the end of April, the first source said.
Potential strategic bidders mentioned in the press include Focus chairman and founder Bill Archer with financial backing from Cerberus Capital Management, UK counterpart Homebase and Kingfisher-owned B&Q, and Grafton, the Irish builder’s merchants.
In addition to the mezz debt, Focus’s capital structure includes approximately GBP 285m senior credit facilities. The senior facilities initially consisted of a GBP 96m TLA paying LIBOR+ 250bp, a GBP 57m TLB paying LIBOR+ 300bps, GBP 57m TLC paying LIBROR+ 350bp and an undrawn GBP 75m revolver with drawn pricing at LIBOR+ 250bps. Focus’ senior debt was recently quoted around 98-99, according to the market participant.
In January 2006 Focus’ senior lenders granted the company covenant amendments and a reset out to April 2007. In exchange lenders received a 25bps amendment fee and 8% annual PIK pro-rated across the TLA, TLB and TLC on total borrowings outstanding (excluding the revolver) of up to GBP 75m. The PIK accrues annually and is payable on repayment of the senior facilities or a sale of the business.
Despite the ongoing sales process, Focus’ near-term operational prospects appear weak. “The company’s profitability is weaker than peers and has been adversely affected by the downturn in the UK DIY market since 2005 as the company had to increase investments in advertising and promotional campaigns that helped to outperform the market in terms of revenues but had a negative impact on margins,” according to a recent Moody’s report.
During 3Q06 revenue declined by 0.4% compared to 3Q05, following a decline of 3.6% in 2Q06 and 10.5% in 1Q06. The company is expected to maintain lower margins going forward as it continues to implement an aggressive pricing and promotional policies in order to remain competitive, the report went on to say.
In the past, the mezz lenders have been critical of the company’s performance and would like it to shut down underperforming stores and then restructure around the better performing part of the business, the sources said. Focus is estimated to have between GBP 30m-GBP 45m in current pension liabilities, an industry source and the second source.
However, the equity sponsors said they believe a sale is their best chance at a maximizing a recovery, the first source countered. “The company is solvent - they do not owe any money until July, and there is no reason that it cannot be sold in its entirety,” he said.
Focus faces more onerous bank covenant tests beginning July. Focus’ senior lenders granted Focus’ request for covenant amendments and a reset out to April 2007 in January last year. Covenants re-set included total net debt/LTM EBITDA, total senior debt/LTM EBITDA, LTM EBITDA/net interest payable, LTM EBITDA/total senior interest and cash flow out to 29 April 2007.
Senior lenders also requested the inclusion of a trading EBITDA covenant test. Total leverage headroom during the reset period is projected at between 7.5%-17%, senior leverage headroom at 8%-18.8% and interest cover headroom at 6.3%-13%. After April 2007, covenants revert back to original levels unless a further reset is agreed upon by the lenders.
--------------------------------------------------------------------------------------------------------
Debtwire is the most informed news service available on global distressed debt and leveraged finance and is used by hedge funds, proprietary trading desks, asset managers, restructuring financial and legal advisors. Debtwire provides clients with articles such as the one above in real-time via an online platform and personalized email and BlackBerry alerts. For further information on Debtwire please email ft@debtwire.com
or call us at Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731
