Harbor Freight Said to Set Rate on $1 Billion Dividend Loan

Harbor Freight Tools USA Inc. set the rate it will pay on a $1 billion covenant-light term loan it’s seeking to refinance debt and support a dividend, according to a person with knowledge of the transaction.

The tool and equipment retailer is proposing to pay interest at 4 percentage points more than the London interbank offered rate, with a 1 percent minimum on the lending benchmark, said the person, who asked not to be identified because the information is private.

The proposed rate would be the lowest of the last three loans that Harbor Freight has used to pay shareholders a dividend, according to data compiled by Bloomberg. The Calabasas, California-based company, started by Eric Smidt and his father as a mail-order tool business in 1977, borrowed money at higher rates to support payouts in May 2012 and December 2010, Bloomberg data show.

“Harbor Freight Tools’ proposed debt-financed dividend falls in line with our expectations for the company to periodically increase leverage to the 4 times-area for a debt-financed dividend and then manage leverage down through growth and profitability to the low 3 times-area,” Standard & Poor’s credit analyst Nalini Saxena wrote in a report yesterday.

Harbor Freight’s debt to earnings before interest, taxes, depreciation and amortization, or leverage, was 3.1 times as of April 30, according to S&P. The ratings firm graded the proposed debt B+, in line with its corporate credit ranking.

Lender Discount

The company is offering the six-year debt to lenders at 99 cents on the dollar, the person said. Lenders will have until July 24 to let Credit Suisse Group AG, the bank arranging the financing, know whether they will participate.

Harbor Freight obtained a $750 million term loan in May 2012 to pay a dividend, Bloomberg data show. That loan, which will be replaced by the new financing, pays interest at 4.25 percentage points more than Libor, with a 1.25 percent minimum on the lending benchmark, the data show.

In 2010 it obtained a $650 million loan that paid interest at 5 percentage points more than Libor, with a 1.5 percent minimum on the lending benchmark, Bloomberg data show.

Alan Mutchnik, a spokesman for Harbor Freight, didn’t immediately respond to an e-mail seeking comment.

Under a revolving line of credit, money can be borrowed again once it’s repaid; in a term loan, it can’t. Covenant-light debt doesn’t have typical lender protections such as financial-maintenance requirements.

To contact the reporter on this story: Krista Giovacco in New York at kgiovacco1@bloomberg.net.

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net.

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