LevFin Insight: Save-A-Lot doc changes rein in add-backs, incremental borrowings

Alongside yesterday afternoon’s upward flex, a Citi-led arranger group unveiled a host of documentation changes to Save-A-Lot’s LBO financing, which scale back the issuer’s ability to issue incremental debt and limit add-backs to EBITDA, according to sources.

Onex is acquiring the discount grocer from Supervalu for approximately $1.4 billion. The deal’s original proposed yield in the low 7% area reflects challenges around the B2/B credit—it’s a business with limited free cash flow generation and EBITDA that’s declined in recent quarters—though investors also scrutinized documentation. It’s an all senior capital structure, albeit with a healthy $660 million equity check. Pro forma leverage runs about 3.8x, or about 3.5x on a net basis, sources said.

At $105 million, the free-and-clear component of the incremental facility isn’t aggressive by market standards—it is just over a half a turn of EBITDA, which compares with the average of 0.72x turns in the third quarter, according LFI sister product Covenant Review—though as revised, the grower component was removed. Originally, the free-and-clear component was sized at the greater of $105 million or 50% of LTM EBITDA. The so-called grower concept has faced pushback from the buyside and has been removed from other recent transactions such as HealthSun Health Plans and Genesys Telecommunications Laboratories, though it has slipped through some in deals, including TricorBraun’s LBO financing, which allocated earlier this week.

The issuer also tightened the unlimited component of the incremental facility, which is now available up to 3.25x net senior leverage, from 3.5x originally. The issuer also tightened by a quarter turn the leverage threshold for junior and unsecured debt, to 3.75x.

And quite predictably, the aggressive six-month MFN sunset provision was also removed. Only a handful of deals have cleared in with a sunset; one recent example was Rackspace Hosting’s very heavily oversubscribed LBO financing.

Save-A-Lot is one of several recent borrowers to tighten parameters around EBITDA adjustments. Specifically, the discount grocer placed a 25% cap on add-backs and reduced the look forward period to 18 months, from 24 months outlined initially. Also, the issuer is no longer able to add back losses attributed to new projects.

Following yesterday’s revisions, the deal is said to have filled out ahead today’s 5 p.m. ET deadline.

As reported, the arrangers yesterday sweetened the economics of the deal to L+600, with a 1% floor and a 97 OID. The spread represents the wide end of the original L+575-600 range, though the OID was originally outlined at 99. As revised, the paper yields about 7.79% to maturity, versus 7.12-7.39% at the original guidance. – Kerry Kantin/Chris Donnelly

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