Workflow Management eyes high yield bond sale, divestiture to allay interest rate hike

By Paul A. Harris

St. Louis, Mo., June 7 - When Workflow Management breached a leverage covenant in its secured credit facility on April 30, the banks told the company it could de-lever, take out the facility or face an increase to 12% from 7.8% in its interest rate.

According to Workflow chief financial officer Michael L. Schmickle, the company's planned offering of $170 million of seven-year senior secured notes (B2/B+) via Jefferies & Co. is one of two options it is pursuing in order to stave off the rate hike.

"The bank group (led by Fleet) basically laid out a couple of different scenarios that we could follow to get leverage back down to where they would like to see it," Schmickle told Prospect News on Monday. "We could do an asset sale or restructure the facility in a way that basically takes the bank out, which would be the high-yield debt option.

"If neither one of those happen by the end of July they have agreed to restructure their facility and allow us to continue to operate and have the ability to borrow or pay down debt with them. That new credit facility would mature on October 2003 and carry an interest rate of 12%.

"That's a fallback plan," Schmickle added. "We don't want to be in that scenario. But in the event that a divestiture or a restructuring of the current facility doesn't take place we know we still have a fallback plan, and can continue to operate after July 30. We would just be in another operating environment."

In a recent filing with the Securities and Exchange Commission the company stated that its bank lenders waived its default, and increased the required leverage ratio to 4.15 to 1.0 from April 30, 2002 through July 30, 2002. For July 31, 2002 onwards the required leverage ratio will be 3.75 to 1.0.

Although Schmickle declined to confirm the timing, Workflow's junk bond deal is set to hit the road Tuesday and wrap up on June 27, according to an informed source.

Schmickle said that since Workflow Management was spun off from U.S. Office Products in 1998 it has undergone a transition from a firm that was primarily focused on manufacturing to one whose main business is outsourcing. Hence divestitures would likely entail the company's print manufacturing assets and locations.

"When we were spun off as a public company we were two-thirds print manufacturing and one-third outsourcing," he said. "We were about $350 million in revenues at that time.

"We've changed that mix, now, to be about 50-50. And we're $640 million in revenues.

"Historically the goal of the company has been to become an out-sourcer of print - a distributor of print, and shed ourselves of the more heavily capital-intensive print business. I think it's fair to say it would be some of the individual assets within the printing division."

Schmickle said that according to information recently published in Forms magazine the company is the largest distributor of printed documents in the US.

He also said that even in a post-July 30 environment in which the company faced the higher interest rate it would still be free to attempt a deleveraging strategy involving bond financing or a divestiture.

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