OM Group notes contain "unique" equity claw

By Paul A. Harris

St. Louis, Mo., Dec. 6 - A novel equity claw in OM Group Inc.'s offering of $400 million ten-year notes has investors taking a close look at the deal out of Credit Suisse First Boston.

"OM Group is going to be a fabulous deal because they're coming with an equity financing that's going to result in a four-point clawback in a very short period of time," Evergreen High Yield Fund manager Prescott Crocker told Prospect News on Thursday.

Last summer OM Group acquired DMC-squared, a division of the German company, Degussa. They financed the acquisition with a bridge loan, and will use the proceeds of the new 10-year notes to take that loan out, a syndicate official explained Thursday.

The equity offering, however, will not be transacted until January or February of 2002, due to the required procedures with the Securities and Exchange Commission.

With the equity offering coming in the near future and with relative certainty, investment bankers working on the deal saw an opportunity to provide the company increased flexibility, in addition to saving them money when they claw back the bonds in early '02.

Instead of the typical clawback of three years, for par plus the coupon (the talk on the OM notes is 9¼%, which would result in a 109.25 clawback), the bankers set up this special clawback at 104, provided it is executed within 120 days.

"Unlike in the typical high yield deal, where there's some prospect that the company might do equity some time in the future, we were pretty certain that they were going to do the equity in this case," the official said.

"So we wanted to give them the opportunity to take out the bonds at a lower price than they would have under the normal clawback feature, because we thought the company ought to get the benefit of that since the equity was going to happen so quickly after the offering.

"And we also wanted the investors to get the benefit of having some of their bonds taken out quickly."

The official said that although this novel clawback feature has generated some "paranoia on both sides," with investors and the company keen to discern who gets the better deal, so far both sides seem receptive to the novel feature.

"From the investors' standpoint, since the company is highly likely to do the equity deal, they're pretty sure they'll get some of their bonds clawed back at 104," the official said. "So they're happy because they're going to get 104 pretty quickly.

"And the company's happy because they get to replace the whole bridge loan, and they don't have to have 100% certainty on the equity deal. So they're out of the bridge loan, and they're getting to retire some of the bonds at a lower price than they would have if it had been a typical clawback.

"And we're happy," the official concluded, "because frankly I don't think it's ever been done before, like this. It's a pretty unique situation. Normally it wouldn't make any sense to have that short of a window because there's very few companies that would find themselves in this exact situation."

The OM Group deal is set to price Friday.

End

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