Kroll $150 million convertible talked at 2.0-2.5% yield, up 32.5-37.5%

By Ronda Fears

Nashville, Dec. 17 - Kroll Inc. launched $150 million of 10-year convertible notes, to price overnight, with guidance for a 2.0% to 2.5% coupon and a 32.5% to 37.5% initial conversion premium.

Goldman Sachs & Co. is bookrunner of the Rule 144A deal. Bear Stearns & Co. Inc. is co-manager.

The issue is being sold on swap as the New York City-based financial and security consulting firm said it would use a portion of proceeds to buy back 2.78 million shares of common stock simultaneously with the offering.

The subordinated notes will be non-callable for five years with a put in year five.

There also is a 120% contingent conversion trigger and a 120% contingent payment trigger.

A $25 million greenshoe is available.

After using an estimated $69 million on the concurrent stock buyback, proceeds are earmarked for general corporate purposes, including future acquisitions.

Kroll shares closed Wednesday off 3 cents, or 0.12%, to $25.50.

Standard & Poor's assigned a B rating to the issue, with a stable outlook. Moody's Investors Service rated the issue B2 with a stable outlook.

The company's total debt, pro forma for the issuance of the convertible subordinated notes, was $185 million as of Sept. 30.

S&P said Kroll has grown dramatically in the past 18 months through acquisitions, estimating that more than three-fourths of its EBITDA is derived from businesses that it did not own prior to June 2002. Additionally, S&P said the company's goal to generate 12%-15% growth in internal revenue in the next three years poses challenges and uncertainties.

Acquisitions have been financed with a balance of debt and equity, however, S&P noted.

While Kroll has maintained a strong balance sheet through the use of equity for growth, the rating agency said its ability to continue this trend is likely to depend on sustained operating performance and trading levels of its common stock. S&P expects that the capital structure could become more debt-intensive due to additional acquisition activity.

Pro forma debt to EBITDA of 2x and EBITDA coverage of gross interest expense at about 10x for the 12 months ended Sept. 30 are adequate, the agency said.

The company's $25 million revolving credit facility due 2006 is undrawn, but S&P said it expects the company will likely increase the size of its bank facility over the intermediate term as cash balances are invested in acquisitions. The cash balance was $122 million at Sept. 30, according to S&P.

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