August 15, 2019 / 6:39 PM / a month ago

Total Safety sweetens loan to attract lenders wary of oil & gas exposure

NEW YORK, Aug 15 (LPC) - Industrial safety services firm Total Safety made a series of investor-friendly changes to a US$330m acquisition term loan, including selling the debt at a steep discount to snare enough commitments from investors balking at the cyclical nature of the energy sector, according to people familiar with the situation.

The new term loan was offered to investors at a discount of 93 cents on the dollar compared to the initially proposed issue price of 98, sources said. The company will also pay lenders at an increased rate of 600bp over Libor, up from the 550bp margin offered when the loan launched in mid-July, and the maturity was shortened to six years from seven.

“The tolerance for increased leverage in cyclical industries is not high and in oil and gas, several companies have defaulted since 2016. That makes investors nervous,” one portfolio manager said.

Loan investors, increasingly reluctant to take exposure in cyclical industries, are wary that any sudden decrease in oil and gas companies’ production levels could hurt Total Safety’s earnings. Total Safety provides ancillary services to companies in the petrochemicals, oil refining and upstream oil and gas segments, making it susceptible to the see-saw nature of oil prices.

Concerns over a slowing economy sent the benchmark crude oil index to US$58.23 per barrel on Thursday afternoon, a 2.1% dip on the day’s trading, according to data from Refinitiv Eikon. Combative trade rhetoric from the US and Chinese governments, along with a war of words between the US and Iran of late, have also fueled volatility in global oil markets.

High operating costs over the last three years, meanwhile, have hindered free cash flow for oil and gas companies and dealt a knock-on effect to ancillary firms such as Total Safety that rely on business from oil exploration and production firms, among others.

GETTING ON BOARD

Proceeds from the new loan will fund Total Safety’s acquisition of Houston-based peer Sprint Safety and refinance existing company debt. Sources said the acquisition will likely boost earnings and cash flow throughout 2020 but said that wasn’t enough to get investors on board at the outset.

“There has been material softness in this business, so we passed on it,” said a second portfolio manager who viewed the terms of the transaction.

The term loan B, along with a US$37.5m delayed draw term loan (DDTL) and a US$75m asset-based revolving credit facility, will lift Total Safety’s pro forma leverage to the mid-5.0 times area, but this should fall to the low-5.0 times area over the next 12-18 months, according to S&P.

“The riskiness is related to the industry and possibly the company’s increased leverage level,” the first source said.

Nearly a month after launching the transaction, Total Safety finalized the funding terms on August 13, but only after significantly amending conditions to satisfy investor concerns. The size of first-lien term loan and asset-based loan were unchanged, but the DDTL was cut in half to US$37.5m.

Total Safety also offered investors a bunch of lender-friendly documentation changes, in a further sign that the buyside is pushing back on aggressive loan agreements for low single-B rated borrowers. Total Safety and its first-lien term loan are rated B3 by Moody’s Investors Service and B- by S&P.

The company amended the levels of its excess cash flow sweep, a measurement of free cash leftover to pay down debt, and capped the number of permitted add-backs, as suggested cost synergies that can reduce overall leverage levels after an acquisition are known.

In addition, Total Safety agreed to conduct quarterly lender calls and applied a 50bp most-favored nation clause to the life of the loan rather than just for 12 months.

“Industry trends, add-backs, Ebitda adjustments. The market wants to be careful around these things. You pay a bigger cost to be wrong than you benefit if you’re right,” said Mike Herzig, managing director and head of business development at THL Credit.

Goldman Sachs, Citizens Bank and Credit Suisse arranged the debt financing.

Total Safety was acquired by investment firm Littlejohn & Co in March 2017 from Warburg Pincus.

Total Safety, Littlejohn and the banks involved in the transaction either declined to comment or were not immediately available for comment. (Reporting by Aaron Weinman. Editing by Leela Parker Deo.)

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