Investor enthusiasm for Empi seen outweighing ratings downgrade as deal upsizes, reverse flexes

By Sara Rosenberg

New York, Nov. 11 - Institutional investors' excitement over the addition of Empi Corp.'s extra term loan B paper is expected to outweigh any negative reaction that some may expect following Tuesday's rating downgrade of the proposed credit facility.

In fact, not only was the deal size increased, but the syndicate was able to lower pricing on both the institutional and the pro rata tranches even with the lower rating due to overwhelming demand.

"There's not going to be a negative reaction," a fund manager said. "Right now there are over $800 million in commitments in the books for [the previously sized] $150 million term loan. It's now a weaker credit with a lower rating but the institutional market is happy to have more paper.

"Allocations are going to be tiny - less than $1 million to maybe $5 million max. So, it won't have a meaningful affect on a portfolio anyway," the fund manager added.

Empi reworked its credit facility, changing the total size to $190 million from $175 million, consisting of a $165 million six-year term loan B, upsized from $125 million, and a $25 million five-year revolver. The previously proposed $25 million five-year term loan A was removed from the structure.

Due to the increase in size of the term loan B, total debt upon completion of the credit facility will now be 3.87 times as opposed to the previously anticipated total debt level of 3.52 times, according to the fund manager.

Pricing on the term loan B is now set at Libor plus 300 basis points compared to initial pricing of Libor plus 325 basis points. And, the tranche also contains a pricing grid that calls for a reduction to Libor plus 275 basis points if leverage falls below three times.

Pricing on the revolver was also flexed down by 25 basis points to end at Libor plus 250 basis points. And, as in the B tranche, there is a pricing grid that calls for a reduction in the rate depending on leverage. If leverage falls below three times, then the rate decreases to Libor plus 225 basis points, and if leverage falls below 2½ times, then the rate decreases to Libor plus 200 basis points, according to the fund manager.

Proceeds from the $165 million term loan B combined with $4 million in cash will be used to pay a $62 million dividend to shareholders and management (increased from an original dividend amount of $47 million), refinance $76 million of existing bank debt, redeem a $27.5 million note issued by the parent company, and pay fees and expenses.

On Tuesday, Moody's Investors Service downgraded Empi's credit facility to B1 from Ba3 due to "the company's now planned $165 million term loan (from $150 million previously) in support of a higher anticipated distribution to shareholders ($62 million, vs. $47 million previously), which serves to not only boost the company's absolute debt level but also illustrates the extent of the company's tolerance for debt," Moody's said.

"The ratings also continue to incorporate the probability of downward pricing pressure as payers try to curb health care costs, as well as the company's exposure to foreign exchange risk. Supporting the ratings are positive growth trends in the company's market and the company's substantial franchise in that market; its strong financial performance, both historically and as projected; its diversified product portfolio and customer base; and its solid infrastructure," Moody's added.

JPMorgan and Wachovia are the lead banks on the proposed credit facility.

Empi is a St. Paul, Minn., developer, manufacturer and distributor of devices and accessories for orthopedic rehabilitation markets.

Meanwhile, although it has been previously reported that several accounts have been focusing on CamelBak's proposed $100 million senior secured credit facility, some feel that the syndicate may need to add some extra incentives to get the deal done.

"They have five commitments totaling $34 million for an $80 million term loan. It would appear that BNP will have to add call protection or upfront fees to enhance the credit," a fund manager said. "There aren't many assets - not a lot of collateral.

"It's a fairly young company whose results have improved dramatically because of the Iraqi conflict. There's no financial history. It's hard to get a handle on what a normalized level of military business would be. Because of that, the risk is probably greater than the 425 return," the fund manager concluded.

The facility consists of a $20 million five-year revolver with price talk of Libor plus 425 basis points and an $80 million six-year term loan with price talk of Libor plus 425 basis points.

Proceeds will be used to help support the acquisition of 100% of CamelBak's capital stock by the existing sponsor.

BNP Paribas and Bank of New York are the lead banks on the deal, with BNP listed on the left.

CamelBak is a Petaluma, Calif., producer of personal hydration systems.

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