‘Bulletproof’ refinancing for ACCO
ACCO’s finance chief "pleased" with new credit and debt facilities as the company raises $460 million in the bond market
ACCO has successfully refinanced its debt and renewed its revolving credit facilities following two separate transactions which give the OP vendor greater flexibility in its finances.
The company has gone to the bond market to raise $460 million and has also renegotiated a new $175 million revolving credit facility.
At first glance, an increase in total company debt to around $760 million and an interest rate of 10.625 percent on the bond appears a high price to pay.
However, speaking exclusively to OPI, ACCO’s CFO, Neal Fenwick, said that he was "extremely pleased" with the terms that ACCO managed to achieve and that the new financing gave the company a "very robust" capital structure.
ACCO’s previous refinancing dates back to 2005. Its cash flow-based revolver and bank loan package followed a structure that was typical four years ago – but the capital and credit markets have been transformed since then and, as the expiry date for the revolver drew nearer, ACCO was forced to seek a new solution.
As Fenwick explains: "The problem that we had was that the revolver was due to expire in August 2010. In an ideal world we would have just renewed the cash flow-based revolver.
However, the type of cash flow-based revolver that we were able to get four years ago is no longer available to companies unless they are pretty much investment grade – and unfortunately we are not."
The only kind of revolver that ACCO was able to obtain was an asset-backed ABL facility that secures funds drawn against company assets, in ACCO’s case receivables and inventory.
However, the security package that underpinned the previous revolver was the same that underpinned all ACCO’s bank debt. Fenwick says that the bank debt lenders would never have accepted effectively becoming "second-class citizens" in the company’s debt structure, forcing ACCO to refinance the whole of the bank debt too.
My name is ‘bond’
Again, banks are hardly queuing up to lend businesses money – at least on acceptable terms for the borrower – and Fenwick was forced to go to the bond market, issuing what is known as a ‘secured bond’. This means that all the existing collateral that ACCO had against its existing bank debt would be placed in security against the bond, with the exception of the receivables and inventory used against the revolver. The institutions which buy a secured bond are essentially investment funds, for example those which invest pension money, etc., so rather than being financed by the bank market, ACCO is now basically financed by bond investors.
ACCO was originally hoping to raise $420 million from the bond and was also looking at an interest rate of over 11 percent. Fenwick says, though, that the offer was oversubscribed and ACCO was able to raise a further $35 million and negotiate a better interest rate.
Timing was also a key factor. "It just so happened that we went to market in the best week this year of the bond market – that was a stroke of luck and saved us perhaps two points compared to what we’d probably have got in July."
On top of that, ACCO used the extra $35 million to repurchase some of its sub-notes in the market, making an instant $5 million profit.
Nevertheless, the new refinancing has come at a cost to ACCO. At the beginning of the year, the company’s total debt was $705 million.
With fees, and a $40 million hit from a euro/dollar swap which was an obligation of transaction, this has now increased to around $760 million.
The company expects the year-end debt level to return to the $705 million mark, as stronger business cash flow in the second half of the year is used to pay down debt. "We’ll end the year with debt levels at the same as the beginning of the year, but with a much stronger capital structure," says the ACCO CFO.
"For 51/2 years we have no mandatory debt repayment," he notes. "There are no cash pressures on the business and repayments are voluntary."
ACCO will have to repay interest on the bonds twice a year, but Fenwick says that this will simply be generated out of the business cash flow.
"Also, there are no maintenance covenants, unlike a bank loan where each quarter you have to comply with certain conditions," Fenwick continues. "Now there are no restrictions on our ability to run the business as long as we pass what I call ‘very minimal’ tests compared to a bank facility. So it’s a much looser structure and one that is sometimes called a ‘bulletproof’ financing structure."
While things like share repurchases and acquisitions are still specks on a future horizon, at least ACCO is under no pressure to offload any of its assets.
There was some speculation a few months ago that it could be forced to sell off its Kensington division. That seems highly unlikely now that the banks are no longer breathing down the company’s neck.
The company is still highly leveraged, but is now in a more comfortable financial position to weather the soft market conditions before the upturn begins – whenever that may be.