New bond shows market smiling on HD Supply

Thu Jan 10, 2013 3:58pm EST

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Jan 10 (IFR) - HD Supply's new bond priced tight of talk with an aggressive equity claw feature this week, underscoring the improved view of the company and the surging demand for high-yield paper.

Facing leverage that had not got down to the level at which it could refinance with senior unsecured notes, the Georgia-based industrial distribution company decided to come out Wednesday with a senior subordinated note.

It turned out to be a savvy bet on a red-hot market.

HD Supply launched a US$650m eight-year non-call three senior sub note offering to repay roughly US$600m of its outstanding 13.50% notes at 103.375. BofA Merrill, Goldman Sachs, Barclays, JP Morgan, Deutsche Bank, Credit Suisse, Wells Fargo and UBS were joint leads.

As a comparable the leads used the company's 11.50% notes due in 2020, which recently traded at 114 dollar price for a yield of 8.375% before moving up to 116 (7.90% yield).

Whisper talk started at 11% and moved in to 10.75% area for the official guidance. The deal ultimately priced through the price talk level at 10.50%, and was upsized to US$950m.

The increase allows the company to fully repay all of the 2015 senior sub notes, and at eight years in maturity, the notes push out the weighted average life of HD Supply's balance sheet.

The issuer was able to take advantage of the fact that Ebitda was up about 35% in the last two months of 2012, compared to the last two months of 2011. This Ebitda expansion also means that the company could effectively deleverage in the near term.

Underwriters were also able to include an aggressive IPO-specific special equity claw, whereby after July 31, 2013, either 100% of the notes - or an amount up to 2/3 - may be redeemed with IPO proceeds at 103 until January 31, 2014. (This was initially whispered at 104, but leads were able to move it in even tighter to 103).

After January 2014, the notes could be redeemed at a price of 102 until July 31, 2014.

The claw greatly benefits the issuer, while capping the upside that investors can achieve. The typical equity claw amounts to par plus the full coupon (110.50 in this case).

SHAPING UP

This week's deal is the latest in an aggressive and successful campaign started last year to address a near-term debt problem.

Formerly a hung LBO after being acquired from Home Depot in 2007 by Bain Capital, Clayton, Dubilier & Rice and The Carlyle Group, the company was facing roughly US$9bn in debt that was coming due in the next three years.

A successful refinancing last April, when the company priced a US$1.625bn two-part bond, set the stage for two follow-up transactions in July and October worth US$1.3bn combined.

Last October's US$1bn senior unsecured offering, rated Caa2/CCC+, repaid a portion of 13.50% senior sub notes due 2015. That deal included a unique restricted payment feature to allow the company to refinance the remaining portion of its senior subordinated notes with more senior unsecured debt, subject to total leverage being at or below 7.25x.

Altogether, last year's refinancings shifted the weighted average life of the balance sheet from under three years to more than six years.

Not surprisingly, the market is now taking a much rosier view of the credit.

Even with the aggressive claw, Wednesday's deal drew demand beyond expectations. It was heard there were roughly US$2.85bn-US$3bn in orders, with existing holders involved as well as new long-only accounts.

The new Caa2/CCC+ rated notes are performing strongly in the secondary market, breaking higher at 101.75 and climbing to 103.50-104 on Thursday.

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