A $30 Million Golden Parachute Courtesy of Junk-Bond Market

Updated on
  • Refi deal helps fund almost $30 million for executive exit
  • Ferroglobe will pay more than 9% interest to cover package

When a silicon producer controlled by one-time Spanish finance minster Juan-Miguel Villar Mir came to the U.S. junk-bond market last week, the deal had one curious provision.

Ferroglobe Plc earmarked a piece of the bond sale to help fund most of a roughly $30 million payment to Alan Kestenbaum, the former executive chairman who resigned a year after merging his North America-focused Globe Specialty Metals Inc. with billionaire Villar Mir’s Spanish conglomerate.

Juan-Miguel Villar Mir

Photographer: Santi Cogolludo/Bloomberg

Issuers typically don’t turn to debt investors to fund golden parachutes, and companies this size don’t often have a cash commitment this big for an executive headed out the door. In this case, the award is in addition to the 5 percent stake that Kestenbaum already owns in Ferroglobe. What’s more, the company is expected to post an annual loss for the calendar year.

But in an anything-goes debt market, borrowers have been able to execute deals that may not have been possible just a few months back. It’s a byproduct of demand for high-yield securities that has led to returns topping 25 percent since the market bottomed exactly a year ago. Voracious investor appetite has allowed for the fastest pace of new speculative-grade deals since September.

"There has been a slew of issuance which has been more aggressive," said Tom Stolberg, a money manager at Loomis Sayles, who looked at the Ferroglobe deal and decided to pass. "We’ve seen more creativity, more pressure and more aggressive structures and covenants coming through in deals in recent times. And it’s happening when investors are dying for yield."

Ferroglobe Chief Financial Officer Joe Ragan declined to comment.

Debt Terms

Ferroglobe came to the market to refinance its debt and win waivers on a credit facility amid a slump in earnings, according to people with knowledge of the matter. The new bond also has leeway for additional dividend payments, another person said.

Moody’s Investors Service provided a provisional rating of B3 on the notes, a level that indicates high credit risk. The bonds, arranged by Goldman Sachs Group Inc., will pay 9.375 percent, which is in line with what even-lower rated issuers have been paying recently in the U.S.

That rating is conditioned on the disposal of the company’s Spanish hydroelectric assets for over $200 million, which should go toward paying down debt, according to the Moody’s report.

Exit Package

Kestenbaum bought what would eventually become Globe Specialty out of bankruptcy more than a decade ago for about a million dollars and then took the Miami-based company public in 2009. In early 2015, he inked a deal with Villar Mir’s Grupo FerroAtlantica to create the world’s biggest silicon-metal producer. The merger closed later that year and Kestenbaum, 55, was named executive chairman of the combined entity. He remained on the job for about 12 months before resigning on Dec. 31. The tie-up with the European company gave 55 percent of the business to Villar Mir’s company.

Kestenbaum’s exit package included $21.1 million in severance, which is the part being financed by the bond offering, and an additional $725,000 for giving up his right to enter arbitration proceedings over how Ferroglobe had calculated the payment, filings show. He also got accelerated delivery and payout of certain equity awards and accrued dividends, worth a combined $6.23 million on the day he resigned, and about $749,000 in bonus for the second half of 2016.

Soft Landing

The total $28.9 million golden parachute, which is almost as much as the $31.3 million that Globe Specialty’s shareholders earned in fiscal 2015, was driven by two factors: large bonuses and a high payout multiple. Severance payments usually are based on an executive’s salary plus annual bonus, multiplied by a specified amount. Kestenbaum was entitled to receive his $995,000 salary plus the $6 million average of annual incentive awards granted to him in the past five years, times a factor of three.

That’s among the highest multiples typically found in executive employment agreements, based on public company filings reviewed by Bloomberg. If the company delayed the payout to Kestenbaum, who left at the end of 2016, it could have triggered 5 percent annual interest on the severance payment, according to filings.

Using the proceeds in a junk-bond deal for an exit package is uncommon for a public company, because the payment doesn’t fund operations or growth plans likely to generate returns that benefit the company and its lenders. In some ways, it’s similar to dividends extracted by private-equity owned companies, according to Moody’s analyst Gianmarco Migliavacca.

"They probably agreed to this compensation at the time of the merger as Kestenbaum is one of the founders and was instrumental in making the deal happen," Migliavacca said. "This was a kind of golden parachute as a way of providing him with some guarantees."

— With assistance by Luca Casiraghi

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