Less than nine months after KCP Income Fund sold out at the height of the private equity boom, credit markets are signalling concern that the bleach and soap maker may be one of a raft of buyout targets that are unable to cope with heavy debt loads in the face of the slowing economy.
Already, Quebec bathroom fixture maker Maax Holdings missed an interest payment late last year and was forced to try to renegotiate loans stemming from a 2004 private equity buyout. Investment bankers say more deeply indebted private-equity-owned companies are likely to end up in the same situation.
KCP, since renamed Kik Custom Products, has a high debt load, even by the stretched standards of the buyout binge. The company, based in Concord, Ont., owes about $7 (U.S.) for every dollar of earnings available to pay interest, according to a recent Standard & Poor's report.
New York-based private equity firm CI Capital Partners paid about $700-million for the manufacturer in early 2007, a 25-per-cent premium to the TSX price for KCP units, financing the purchase with about $645-million of loans in the target's name.
Those loans have plunged in value to levels that debt investors say usually signal distress for the borrower. The first-lien loan that gives first call on the assets of Kik Custom Products this week drew bids of 66 cents on the dollar, according to S&P. The second-lien loan garnered bids of 35 cents.
"We have a little saying about bonds and loans: They don't live in the 60s for long, because either something good happens and they go back to the 80s or 90s, or they go to the 30s and 40s," said Barry Allan, head of Toronto-based Marret Investment Management, which has $1.6-billion in fixed-income assets that include loans. In general, he said, "it's very rare for things to trade in the 30s and not go bankrupt."
To be sure, Kik isn't alone. Almost every buyout loan is trading at a discount amid concern about the economy and a general lack of buyers, though Kik's are at the low end of the spectrum. The average price of a leveraged buyout loan last week dropped below 90 cents for the first time.
Kik's first-lien loan drew bids of 93 cents on the dollar before the company discussed third-quarter results with lenders in November, according to S&P.
Kik doesn't have to disclose results because it's now privately owned, and officials from Kik and CI declined to comment on the company's prospects. However, in a press release Monday announcing a new chief executive officer and chief financial officer for Kik, CI president Steven Lefkowitz said Kik is facing "short-term challenges," but the opportunities for "organic growth and improvement in operational efficiencies are significant."
The company, which had 2006 revenue of more than $1-billion and employs more than 4,000 people, is facing a number of pressures. As a contract producer that makes goods for name-brand companies, margins are skinny. Its biggest customers are large consumer goods producers such as Procter & Gamble Co. and Johnson & Johnson, which could be hurt by slowing spending in the United States.
Kik has a credit rating of B-minus with a stable outlook from S&P, which is defined as a company that can currently meet obligations but "adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments."