Falcone’s Spectrum Loan Shaves Interest Costs: Corporate Finance

Philip Falcone’s Spectrum Brands Holdings Inc. is improving creditworthiness at the fastest pace among high-yield U.S. consumer-products makers as it taps the loan market to cut debt-service costs after a $1.4 billion acquisition.

The extra yield creditors demand to hold bonds of the owner of the Remington shaving products and Rayovac batteries instead of Treasuries has dropped 143 basis points this quarter, Bank of America Merrill Lynch index data show. The Madison, Wisconsin-based company is seeking $1.15 billion of loans with initial interest rates of 3 percent for four years and 3.5 percent for six to pay down $950 million of 9.5 percent secured notes, resulting in annual savings of about $50 million.

Spectrum Brands, which emerged from bankruptcy in 2009 and is 59 percent owned by Falcone’s Harbinger Group Inc., is winning favor in credit markets with plans to cut its $3.26 billion of debt by $450 million in the two years through 2014. Standard & Poor’s raised the company’s rating to B+ from B this month, reflecting growing free cash flow and other benefits from the 2012 purchase of Stanley Black & Decker Inc.’s hardware unit.

“They made a good acquisition that’s exceeded expectations and they are generating good cash flow, which they have used for debt reduction,” Brian Milligan, a Chicago-based credit analyst at S&P, said in a telephone interview. “This transaction reinforces their commitment to reduce leverage.”

S&P’s rating change brings it in line with Moody’s Investors Service grade of B1.

SEC Settlement

Jamie Tully, a spokesman for Spectrum Brands at Sard Verbinnen & Co. in New York, declined to comment on the company’s debt transactions.

Falcone and his Harbinger Capital Partners LLC, which controls Harbinger Group, agreed yesterday to pay an $18 million fine, and the billionaire accepted a five-year ban from the securities industry, according to the U.S. Securities and Exchange Commission. The SEC had accused him of improperly borrowing from the fund and favoring some investors over others.

The settlement with the SEC doesn’t require Falcone to give up control of Harbinger Group, according to a regulatory filing yesterday.

Loan Terms

Interest on the $850 million four-year term loan changes to a floating rate of 225 basis points more than the London interbank offered rate when the lending benchmark exceeds 0.75 percent, according to data compiled by Bloomberg. The debt, which is being arranged by Credit Suisse Group AG, amortizes at a rate of 7.5 percent per year. The $300 million six-year obligation amortizes at 1 percent a year and floats at 275 basis points over Libor when the rate exceeds 0.75 percent.

Three-month Libor was fixed at 26 basis points yesterday. A basis point is 0.01 percentage point.

The loan will be used to redeem senior secured notes coming due in 2018, Spectrum Brands said in an Aug. 6 statement. The firm is offering 111.6 cents on the dollar to investors, with the offer expiring on Sept. 3.

Spectrum’s $520 million of 6.375 percent notes maturing in November 2020 were quoted at 105.563 cents on the dollar to yield 5.43 percent at 10:00 a.m. in New York, according to prices compiled by Bloomberg. The notes, which trade at a spread of 318 basis points, compare with an average spread of 467 basis points for comparable bonds, Bloomberg data show.

Coleman, NBTY

The spread compression for Spectrum Brands’s bonds compares with 56 basis points for the Bank of America Merrill Lynch U.S. High Yield Consumer Products index. That gauge also includes Jarden Corp., the maker of Coleman camping goods and Sunbeam appliances, and the Carlyle Group LP-owned nutritional supplement provider NBTY Inc.

The company has trimmed $100 million from its existing term loan and plans to reduce another $100 million before the end of September, and a higher amount next year, Chief Executive Officer David Lumley said on an Aug. 6 conference call with analysts and investors.

Spectrum Brands’s ratio of total debt to earnings before interest, taxes, depreciation and amortization of about six times is double the average for U.S. consumer products companies with at least a billion dollars of debt.

The company’s divisions excluding the Stanley Black & Decker Unit reported adjusted Ebitda margin of 16.8 percent in the three-months ended June 30, a record high, Lumley said.

‘Positive Results’

“They make a big noise about their legacy business, which was difficult to manage, and they are assuring investors that has stabilized,” Kim Noland, a debt analyst at research firm Gimme Credit LLC, said in a telephone interview. “Their efforts to manage debt are getting them positive results.”

Spectrum Brands’s household products range from batteries and appliances to home-improvement goods, garden supplies and pet food. The Stanley Black & Decker hardware and home improvement unit contributes more than 20 percent to the company’s sales, which rose to $1.1 billion last quarter.

“They bought a very high earnings-powered business,” Hamed Khorsand, a Woodland Hills, California-based equity analyst at BWS Financial Inc., an investment-research firm, said in a telephone interview. “They have been growing their brands organically, and also making acquisitions to grow.”

7 Purchases

The company has completed seven purchases in the last three years, forking out about $2.3 billion, Bloomberg data show.

Spectrum Brands filed for Chapter 11 protection in February 2009 to implement a debt restructuring after defaulting on a bond interest payment, according to a statement at the time. The negotiations with noteholders included an agreement to waive 80 percent of the principal for new shares, the company said.

Falcone initially acquired 12.6 million Spectrum Brands shares, or 42 percent of the company, in exchange for debt held before the bankruptcy and a supplemental loan, according to a 2009 regulatory filing.

Some of the other industries in which Falcone’s firm has a stake include insurance, energy and financial services, according to an Aug. 8 statement.

Spectrum Brands’s Ebitda is expected to increase to $646.5 million in the year ending September 30, according to the mean estimate of four analysts surveyed by Bloomberg.

Cumulative free cash flow for 2013 and 2014 may be as much as $600 million and the company will direct a significant portion of that toward accelerated debt reduction, according to Milligan.

“The recently announced transaction gives them a snapshot picture that looks better to investors and ratings agencies,” Noland said. “The problems with their debt restructuring are starting to be in their distant past. How long do they have to carry that taint? Not long in this kind of market.”

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