Affinion ends Q1 with intact revolver, $83 million cash; will address 2015 maturities 'proactively'

By Paul Deckelman

New York, April 25 - Affinion Group Holdings, Inc. increased its cash balance in the first quarter of 2013 from where it had been at the end of 2012, closing out the latest quarter with $82.5 million of unrestricted cash and equivalents and no borrowings against its $165 million revolving credit line, other than $13.2 million letters of credit. Borrowing availability stood at $151.8 million.

And its chief financial officer said Thursday that the Stamford, Conn.-based company has historically been aggressive in addressing its balance sheet obligations and will continue to do so going forward - particularly with two series of junk bonds scheduled to come due in the fall of 2015.

"As we have demonstrated many times in the past, we have a strong preference to be proactive in addressing the needs of our capital structure, and we would expect to do so here as well," CFO Mark Gibbens told analysts on the company's conference call following the release of its results for the quarter ended March 31.

Gibbens is faced with the Nov. 15, 2015 maturity of the company's $325 million face amount of 11 5/8% notes, its most expensive piece of paper interest rate-wise. The bonds carry an annual interest cost of $37.78 million, payable in two installments of $18.89 million, one in May and the other in November.

Needs covered - for now

In outlining the company's finances and obligations during the call, Gibbens noted that the consolidated $82.5 million cash balance consisted of $63.1 million held at Affinion's principal operating company subsidiary, Affinon Group, Inc., and some $19.4 million at the parent holding company level. The latter amount, he said "is sufficient to satisfy the next interest payment due on the notes" coming up in May.

"As for the subsequent payments, although we don't currently meet the leverage governor for making additional cash dividends from OpCo to Holdings, I remind you that our indentures and credit agreements provide us with a general basket and the flexibility to provide sufficient funding for the HoldCo interest through November 2014. Thereafter, we would be less than a year until the HoldCo's eventual maturity in the fourth quarter of 2015."

With that deadline then coming up, he said, "Accordingly, it's highly likely that we would be looking to address the HoldCo notes through a refinance or redemption prior to [their] becoming a near-term debt obligation on the Holdings balance sheet."

A knotty problem

Affiinion's efforts to do so might be complicated by the fact that its consolidated capital structure also includes $355.5 million face amount of 11½% senior subordinated notes issued by the operating company that are scheduled to mature a month before the holding company notes do, on Oct. 15, 2015, as well as $1.09 billion of term loan debt maturing in October of 2016, also at the operating company level.

However, the credit facility agreement contains a stipulation allowing the company's lenders to accelerate the term loan - the largest piece of debt in the capital structure - to mid-July of 2015, three months before the subordinated notes are due and a full 15 months before their officially scheduled maturity, unless Affinion, by that date, either makes arrangements with the lenders to extend the subordinated notes to at least January 2017 - three months after the term loan maturity date - or else manages to repay the notes in full or refinance them with new loans or bonds, or both, with maturity dates after those of the term loan.

During the question-and-answer portion of the conference call following the formal presentations by Gibbens and the company's chief executive officer, Todd H. Siegel, an analyst inquired about management's thinking on whether Affinion would, in fact, take out the higher-coupon holding company notes first, or the earlier-maturing operating company subordinated notes, in order to prevent the possible acceleration of the term loan. Gibbens replied that at this point it would be "a little premature" to describe its strategy in that regard.

Keeping within the covenants

At the end of the quarter, Affinion Group Holdings' consolidated long-term debt on the balance sheet stood at $2.23 billion - $1.91 billion of that at the operating company level, plus the holding company's 2015 notes. Besides the term loan and the 2015 subordinated notes, the operating company debt load also included $475 million face amount of 7 7/8% senior notes due 2018.

The consolidated company's senior secured leverage ratio of debt as a multiple of adjusted EBITDA stood at 3.05 times, and its annualized interest-coverage ratio was 2.3 times.

"While both of these metrics are significantly favorable to the maintenance covenants governing the term loan, and we would remain in compliance with those covenants through no less than early 2015 at the current levels of performance, our guidance obviously indicates that our clearance of the covenants will lessen somewhat over the course of the year," Gibbens cautioned.

He noted that up-front investments the company plans to make in its various businesses will lower its near-term adjusted EBITDA. However, he said that Affinion remains "very comfortable with our ability to do this while managing our obligations and commitments, because these investments consistently produce high measurable results over an extended period of time."

Affinion is a business services company that provides customer engagement and loyalty programs to other companies, allowing the latter to sell such services as credit monitoring and identity-theft resolution, travel services, insurance policies, in-store discounts on merchandise and other services and shop-at-home conveniences to their own customers.

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