The Carlyle Group has accumulated more than $200 million worth of debt of its increasingly distressed portfolio company, the privately held industrial products maker Sequa, according to sources. The holdings were disclosed on Wednesday to investors in the company’s year-end results, and the company is holding a call today, during which parties expect the company to address what the sponsor and the company intend to do about its unsustainable capital structure.
The company may have liquidity but cash dwindled through last year, according to sources, and the bonds and term loan have continued to deteriorate over the past several months, with the unsecureds trading in the mid-teens, last at 14/16, according to trader runs, and the term loan last quoted in the high 60s.
Carlyle has bought at least an additional $100 million of the company’s debt in the past year, since the previous 10-K disclosure, according to sources. One source pegs the amount at $235 million, mostly in the company’s bonds. Evercore - which advised on the initial LBO - may be advising the company on an unofficial basis on its options given the situation, according to sources. The company would need to get a restructuring done ahead of the upcoming 2017 maturities of both its loans and bonds, sources say. The company lost some contracts because original equipment manufacturers had been trying to build back customer relationships. Last year, there was a bondholder group forming, according to sources, but they have diminished substantially and Carlyle appears to have purchased many of them, so no group ever materialized.
Carlyle spokesman Chris Ullman and Sequa spokesman Andrew Farrant declined to comment. A spokesman for Evercore did not respond to requests for comment.
Carlyle
purchased Sequa in 2007 for $2.7 billion; accounting for the $1.85 billion debt package, part of which was a revolver, Carlyle’s equity contribution came to around $1 billion with no subsequently announced dividends.
Sequa Corp. operates in the aerospace industry through Chromalloy Gas Turbine and in the metal coating business through Precoat Metals. The latest ratings note came in August, when Moody’s downgraded Sequa’s corporate rating to Caa2 from Caa1, the $1.268 billion term loan and the $200 million revolver due June 2017 to Caa1 from B3; and the $350 million senior unsecured notes due 2017 to Ca from Caa3. The company’s revenue for the 12 months ending June of last year was $1.3 billion. At the time, Moody’s pegged cash balances at $44 million as of June 2015, with limited revolver availability and $65 million outstanding on its $75 million receivables financing facility as of June 2015. That facility matured in March, according to Moody’s. In April last year, Standard & Poor’s had already said the company’s “long-term financial commitments are unsustainable,” and had poor results that caused the company’s debt to EBITDA to climb to 35x in 2014 compared with S&P’s expectations of 9x to 10x. Bloomberg reported in August last year that part of the company’s cash burn came from charges related to the November 2013 takeover of Trac Group.
According to sources, the company has had difficulties in its maintenance repair and overhaul business - namely the jet fan blade segment of its business. Other than Lufthansa and Delta, nearly all major airlines outsource their work, and the original equipment manufacturers have been saying if a company uses non-authorized parts, then they are voiding the warrantee. Meanwhile the coatings business, while stable, is smaller. The coatings business levered to non-residential construction mostly, which makes it almost entirely different from the aerospace segment, according to analysts familiar with the name.
Depending on the capital structure steps the company and Carlyle may pursue, an in-court restructuring may be needed unless a consensual resolution can be reached with bondholders. Potentially complicating the situation, sources say that Pimco owns a large portion of the bonds and most of Carlyle’s debt holdings are in the bonds as well.
Funds of
BlackRock ($172 million, disclosed today) and
Oppenheimer ($82 million, as of March 31) are large holders of the term loan, along with smaller holders such as KKR and John Hancock, according to Securities and Exchange Commission disclosures.
The original CEO after the buyout was Armand Lauzon, a Carlyle operating partner who did several rounds of turnarounds with Carlyle. The company was making progress and, but then ran into the problem again with the MRO business, as leased aircraft became more popular and those leased aircraft don’t let you use anything but original manufacturers’ fan blades. Lauzon described his own experience as a CEO of first Chromalloy and then Sequa in the
Wall Street Journal and
Aviation Week. Lauzon ultimately left last year, and an interim CEO took over who intended to partner with manufacturers - and found they would not pay enough. The current CEO Thomas Mepham was
appointed in June.