LPC: Office Depot considers sweeteners to M&A loan

Compucom Software

31/10/2017 19:24

By Andrew  Berlin 
    NEW YORK, Oct 31 (Reuters) - Publicly-traded US office 
supplies retailer Office Depot is considering making revisions 
to the US$750m leveraged loan backing its roughly US$1bn 
acquisition of CompuCom, amid a syndication process fraught with 
investors' wariness with retailers, according to three sources 
familiar with the matter. 
    To attract lenders into the deal, Goldman Sachs, the lead 
underwriter, is likely to boost the loan's yield and shorten the 
repayment period, among potential other changes, the sources 
said.  
    The bank is expected to bump pricing on the loan to 700bp 
over Libor with a 1% floor, versus opening guidance in the 
500bp-525bp over Libor range with a 1% floor, two of the sources 
said. The loan could be offered at a steeper discount of 96% of 
face value, compared to 98.5% at launch, as another way to 
entice buyers. 
    The company is also mulling an accelerated amortization 
schedule, currently set at 1% annually, to tighten investors' 
leash on cash, and making other changes to the credit agreement. 
During syndication, investors took issue over flexibility to 
take cash out of the company and raise additional debt, the 
sources said.  
    Goldman has not yet circulated any official revisions to the 
deal. Commitments are due on Tuesday. JP Morgan, Bank of America 
Merrill Lynch and Wells Fargo are also in the bank group.  
    Investors have pointed to weak earnings at both Office Depot 
and CompuCom and challenges forecasting further declines as 
justification for holding out for better terms. Office Depot's 
sales fell 9.6% from 2015 to the last 12 months ending in June. 
The company expects sales in 2017 to be lower year-over-year due 
to store closures and the difficult retail environment, 
according to a company presentation. CompuCom's sales have also 
declined 9.6% since 2015. 
    Meanwhile, Amazon's threat to Office Depot intensified last 
week when the online juggernaut announced its Business Prime 
Shipping service for users with Amazon Business accounts.  
    The news that Amazon is aggressively pursuing corporate 
customers sent rival Staples' loans and bonds lower by three and 
five points, respectively, to 96 and 90, for yields of 6.75% and 
more than 10%, eroding relative value for the Office Depot loan. 
    Still, the Office Depot deal carries low leverage at 1.3x 
last 12-months' Ebitda of US$790m, and at close touts US$1.537bn 
of liquidity, split between an undrawn US$1.2bn asset-based 
revolving credit facility and US$537m of cash on hand. 
    The combined company could throw off US$234m of free cash 
flow, or roughly 23% of debt, before interest expense and 
projected synergies of US$40m are included, assuming Ebitda and 
capital expenditures remain stable. 
    Goldman Sachs did not respond to requests for comment. 
Office Depot declined to comment. 
 
 (Reporting by Andrew Berlin; Editing By Michelle Sierra and 
Lynn Adler) 
 ((andrew.berlin@thomsonreuters.com; 646-223-6837; Reuters 
Messaging; andrew.berlin@thomsonreuters.com@reuters.net; Twitter 
@TRLPC @andrewmberlin)) 
 
Keywords: OFFICE DEPOT M&A/LOAN