Recovery Report: Dresser Inc.'s $2.05 Billion Facilities
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| Publication Date: Apr 12, 2007 14:02 EST |
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 | Recovery Report: Dresser Inc.'s $2.05 Billion Facilities | |
| | | Publication date: 12-Apr-07, 14:02:38 EST | |
Reprinted from
RatingsDirect
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On April 11, 2007, Standard & Poor's Ratings Services assigned its 'B ' rating and '2' recovery rating (indicating the expectation of substantial (80% to 100%) recovery of principal in the event of a payment default) to
Dresser Inc.'s proposed $1.3 billion first-lien credit facilities, composed of a $150 million revolver and a $1.15 billion term loan B. In addition, we assigned a 'CCC+' rating and '5' recovery rating (indicating the expectation of negligible (0% and 25%) recovery of principal) to Dresser's proposed $750 million second-lien term loan. These ratings are based on preliminary terms and conditions.
Addison, Texas-based Dresser is a worldwide manufacturer and marketer of highly engineered energy infrastructure and oilfield products and services. On March 12, 2007, private equity sponsors Riverstone Holdings LLC, First Reserve Corp., and Lehman Brothers Co-Investment Partners announced that they have signed an agreement to acquire Dresser. The acquisition is being financed with $1.15 billion of first-lien debt, $750 million of second-lien debt, and $500 million equity investment from the financial sponsors.
For the corporate credit rating rationale, see Standard & Poor's
research update on Dresser Inc. published earlier today.)
Table 1
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Dresser Inc. Credit Profile
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Corporate credit rating
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B/Negative/--
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Facility/Issue
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Issue Rating
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Recovery Rating
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Maturity
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Repayment
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$150 mil. first-lien revolver
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B
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2
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2013
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Bullet at maturity
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$1.15 bil. first-lien term loan B
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B
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2
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2014
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1% per year, with the remaining 95% due at maturity
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$750 mil. second-lien term loan
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CCC+
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5
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2015
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Bullet at maturity
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Recovery Analysis |
Table 2, at the end of this report, provides a summary of the proposed terms and conditions. Important considerations include:
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Foreign subsidiaries generate approximately 50% of consolidated EBITDA, and the second loans will not be supported by guarantees or the pledge of the assets of the foreign subsidiaries, due to tax restrictions. Furthermore, the pledge of stock of first-tier foreign subsidiaries will be limited to 65% for tax reasons.
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The revolving credit may be partially drawn by certain foreign subsidiaries to be determined or fully drawn in the U.S. Any revolving credit borrowings by foreign subsidiaries would have a direct claim against these entities--a structurally higher priority claim to such value than the indirect claim to the U.S.-based debt. To be conservative, our analysis assumes that the revolving credit is fully drawn in the U.S.
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The bank loans are expected to include an uncommitted option to increase the revolving credit facility by $150 million, subject to additional lender commitments and other conditions. Our recovery analysis does not assume that this option will be exercised. If it is, our debt and recovery ratings would be subject to reevaluation.
Simulated default scenario|
Dresser's business profile is weak and subject to some volatility due to the capital spending in the cyclical oil and gas industry. Given the company's pro forma debt structure, we estimate that it would take a drop in EBITDA to about $250 million to trigger a default. Standard & Poor's envisions that a distressed scenario driven by macroeconomic weakness would cause a period of low demand from reduced projects in the energy sector, coupled with weak operating margins. Ultimately, the cyclical downturn and low profit margins would trigger a payment default.
Standard & Poor's simulated default scenario further assumes the following:
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Company has to pay cash interest on second-lien term loan after the pay-in-kind option expires,
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A fully drawn revolving credit facility,
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A 250-basis-point increase in LIBOR, and
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No margin rise for other credit facilities due to a lack of financial covenants.
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Valuation|
In the event of a borrower default, Standard & Poor's believes there would be more value in the business as a going concern. Therefore, we deem that lenders would achieve the greatest recovery amounts through reorganization of the company rather than through liquidation. To value the company, we applied a 5x multiple to the EBITDA in our simulated default scenario.
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Results|
Our assumptions yield an enterprise value of slightly more than $1.2 billion, net of priority administrative expense claims. Furthermore, we estimate that the collateral would capture almost $1 billion of this amount after $15 million of estimated third-party debt at foreign subsidiaries and the exclusion of 35% of the value of foreign stock are accounted for. We would expect this to provide nearly 80% coverage of the first-lien debt, including a fully drawn revolving facility. We would expect the uncovered first- and second-lien debt and, potentially, other unsecured claimants to equally share the remaining enterprise value related to the unpledged foreign equities. We believe that this would push the total recovery for the first-lien lenders slightly above 80%, resulting in a recovery rating of '2'. However, we estimate that the second-lien lenders would recover less than 25% of principal, resulting in a recovery rating of '5'.
Table 2
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Transaction Summary
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First- and second-lien bank facilities
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Borrower
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Dresser Inc., with flexibility that a portion of the revolving facility may be available to one or more foreign subsidiaries
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Guarantors
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All of company’s direct and indirect domestic subsidiaries
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Structure
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The revolver matures in six years. Borrowings under the first-lien term loan will amortize 1% yearly, with the remaining balance in year seven. The second-lien term loan will be paid at maturity in year eight. The company can elect to pay its interest in kind on the second-lien loan in the first four years for an additional 75 basis points.
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Security package
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The $1.3 billion first-lien credit facilities have a first-priority security interest in substantially all of the assets of the company and its direct and indirect domestic subsidiaries, as well as the capital stock of all domestic and first-tier foreign subsidiaries, although the pledge of stock in nonguarantor foreign subsidiaries would be limited to 65% for tax reasons. The $750 million second-lien term loan has a second-priority interest in these same assets.
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Legal jurisdiction
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New York
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Financial covenants on first-lien facilities
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None
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Financial covenants on second-lien facilities
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None
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Intercreditor terms
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180-day standstill period
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