Prison Vendor Struggles to Lure Once-Loyal Loan Buyers
(Bloomberg) -- For years TKC Holdings, a provider of food and commissary services to prisons, had found plenty of willing lenders in the market for risky corporate loans. But as scrutiny over the industry intensifies, some of those same investors are now heading for the exit.
The company, which is owned by private equity firm HIG Capital, has struggled to drum up interest for a new leveraged loan offering to refinance its debt, according to people with knowledge of the matter who asked not to be identified when talking about a private deal.
That’s forced TKC and its bankers to rely more heavily on the bond market to complete the sale, where the company is offering investors a yield of over 9% and hoping to expand its investor base beyond current holders, the people said. The shift to include more bonds, which are unsecured and pay a higher rate than the loans, will increase the overall borrowing cost of the deal, the people said.
The debt sale, which totals $1.625 billion across the bonds and loan, comes as criticism of companies that profit from mass incarceration grows louder among social justice activists, Democratic lawmakers and certain investors. Some loan buyers passed on the financing due to environmental, social and governance issues, while others are worried that the Biden Administration may clamp down on the private-prison industry, according to the people.
TKC had only received orders for around half of the $1.125 billion amount initially targeted for the loan portion of the financing before announcing that it would shift $200 million to the bond portion on Monday, the people said.
Representatives for HIG Capital and Jefferies Financial, which is managing the transaction, didn’t immediately respond to requests for comment.
Bankers at Jefferies have been asking for investor feedback on the deal’s overall structure, the people said, typically a sign of tepid demand. Moody’s Investors Service noted in a report last week that the loan contained a number of weak covenant protections that if utilized would negatively impact lenders.
Another issue that’s giving investors pause is a rare feature that would allow the debt to be transferred to a new owner if HIG sells the company, the people said. Normally such a transaction would trigger an early repayment. The so-called portable capital structure, which is included in both the loans and bonds, is a flexibility that investors typically allow only for the strongest companies.
TKC’s private equity owner also has a history of aggressive financial maneuvers, including taking three debt-funded dividends totaling $640 million in 2017, and nabbing another $145 million of dividends in 2020, according to S&P Global Ratings.
Given that HIG has held the company since 2012, there’s heightened risk that TKC’s “debt burden could further increase as shareholders execute an exit strategy or seek additional returns,” Moody’s said in its report.
The now $925 million term loan is being marketed at 475 basis points to 500 basis points over the London interbank offered rate, with a 75 basis point Libor floor and a price of 98.5 cents on the dollar. That translates to an all-in yield of about 5.8% to 6%.
The $700 million of eight-year bonds are being marketed at a yield in the low-to-mid 9% range.
TKC is attempting to repay $1.227 billion of first-lien term loans due 2023 and a $385 million second-lien term loan due 2024. The new commitment deadline for the loan is April 28.
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