NBTY generates cash flow; CFO sees minimal leverage impact from recent dividend

By Paul Deckelman

New York, Dec. 5 - NBTY Inc. continues to generate strong and stable cash flows, according to the company's chief financial officer, so much so that the company was able to significantly cut its debt levels and leverage ratios in the two years since it was taken private by the Carlyle Group.

The Ronkonkoma, N.Y.-based maker of vitamins and nutritional supplements recently did a big junk bond deal and used the proceeds to pay a sizable dividend back to Carlyle.

But CFO Michael Collins told participants at the Bank of America Merrill Lynch 2012 Leveraged Finance Conference in Boca Raton, Fla., on Wednesday, "If you look at interest coverage or leverage ratios pro-forma for this transaction, they're pretty much where they were at the time of the original Carlyle acquisition back in October of 2010. So there are levels of both cash interest needs and leverage that we think we can operate comfortably within."

Strong cash cuts debt

Collins said that the company has been generating "continuous and steady cash flow" at a rate of about $250 million per year, or $1.2 billion total over the last five years, including $500 million in the two years since its acquisition by Carlyle. The company has used some of it to notably reduce debt.

According to materials the company prepared in conjunction with Collins' presentation at the conference, total debt, which stood at $2.4 billion on Oct. 1, 2010, when Carlyle took control of the company, had fallen some $242 million to $2.158 billion by the end of this year's third quarter on Sept. 30, helped along by transactions, such as the $225 million discretionary debt repayment it did in December 2011.

"As the cash accumulated on the balance sheet, we thought the best use of it at that time was to pay down the debt," Collins said.

Even so, NBTY still ended the year with "a lot of cash," about $350 million.

The increase in its cash balance since the Carlyle takeover - from $136 million in October 2010 to $315 million this past Sept. 30, more than double the earlier figure - combined with the overall debt reduction, brought net debt over the two-year period down by over $400 million, to $1.843 billion from $2.265 billion two years earlier.

Combined with gains in EBITDA, which have grown by an average of 12% per year between 2008 and this year, the company's various credit metrics showed improvement. Overall net leverage of debt versus trailing 12-month EBITDA stood at 3.6 times on Sept. 30, down from 4.6 times two years earlier, while the ratio of net senior secured leverage versus EBITDA declined to 2.4 times from 3.3 times over that same period.

Concurrently, the company's coverage ratio of EBITDA versus cash interest costs rose to 4.3 times from an even 3.0 times two years ago.

Bond deal funds dividend

Having made that kind of progress on the debt front, NBTY felt it had room to increase leverage in order to pay out a dividend to Carlyle.

Parent holding company entity Alphabet Holding Co., Inc. sold $550 million of new five-year senior unsecured contingent cash-pay notes carrying a 7¾% cash coupon and an 8½% PIK coupon.

The issue priced at 98 in a quick-to-market deal on Oct. 10 for a cash yield of 8.242% and a PIK yield of 8.776%. Gross proceeds from the deal were $539 million.

NBTY took the net proceeds from the bond deal, plus $200 million of cash from the balance sheet, to pay a $722 million dividend to Carlyle.

Collins told the conference attendees that "pro-forma for the transaction, [leverage] is obviously back up, but still well within the range we feel is manageable."

Pro-forma total debt rose back to $2.708 billion, with $122 million of cash, net debt of $2.586 billion and a net leverage ratio of 4.6 times, all roughly comparable to where they stood at the time of the Carlyle acquisition. Interest coverage decreased to a pro-forma 3.2 times, a little higher than it was two years ago.

However, since the company re-levered using senior unsecured debt, Collins noted: "The net senior secured leverage ratio is down significantly since the original transaction" at 2.5 times debt versus EBITDA, "obviously very minimally changed pro-forma for the dividend re-cap."

Collins further noted that even after the bond deal and the accompanying $722 million equity distribution, "there's still $800 million of investment from Carlyle in the company. They wrote a very significant check when the initial transaction occurred, of $1.55 billion. So there's still a lot of skin in the game from Carlyle's perspective."

Subsequent to the dividend transaction, NBTY separately made a drawdown from the revolving portion of its senior secured credit facilities to finance an acquisition, according to an 8-K filing with the Securities and Exchange Commission.

NBTY entered into an agreement on Nov. 19 to acquire all of the outstanding shares of Balance Bar Co. - a maker of flavored energy bar confections - from Brynwood Partners VI LP for $78 million. The acquisition was completed on Nov. 26.

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