HIG Plans Spinoff of Prison Phone Operator After Failed Merger
(Bloomberg) -- HIG Capital is taking another stab at disposing of Inmate Calling Solutions after regulators stopped its attempt to sell the prison phone operator to one of its main rivals last year.
TKC Holdings Inc., the provider of food and commissary services through which HIG owns ICS, is seeking approval from creditors to spin off the business as part of a management buyout, Moody’s Investors Service and S&P Global Ratings said in notes published on Friday.
TKC plans to lend $280 million in promissory notes to help ICS management finance the transaction. The spinoff is expected to increase TKC’s debt-to-earnings ratio as it will lower revenues and cash flow once ICS starts operating as a separate entity.
“The proposed structure furthermore places TKC creditors at a disadvantage to shareholders under the related-party deal that will result in a loss of collateral and cash flow,” Moody’s analyst Whitney Leavens said in a note.
The debt provided by TKC includes a $220 million payment-in-kind note with a coupon of 6% and a $60 million interest-free promissory note, both of which come due in 2025, according to the credit rating firms. Because the structure does not require ICS to make cash interest payments until maturity, TKC may not receive any cash from the deal until the debt comes due.
While it would have a negative impact on TKC’s credit metrics, the proposed deal will allow TKC and its ultimate owner HIG to distance themselves from the controversial prison phone industry, which has come under fire in recent years for charging inmates as high as $25 for a 15-minute call.
Following the transaction, ICS will operate as a separate company and TKC will retain one minority seat on its board, according to S&P.
TKC and a representative for HIG did not immediately respond to requests for comment.
Worries that the U.S. presidential election will throw prison services company further into the spotlight has weighed on debt issued by Securus Technologies Inc. and Global Tel*Link Corp., ICS’s two main competitors.
ICS and Securus -- which was once owned by HIG but is now a portfolio company of Platinum Equity -- dropped plans to merge in April 2019 after the Justice Department and the Federal Communications Commission raised concerns that the deal could harm competition.
ICS represents around 12% to 15% of TKC’s earnings, according to the rating firms. Both left the company’s ratings unchanged at the low end of the single-B range.
©2020 Bloomberg L.P.