Today PAETEC (news, filings) announced plans to sell some $350M in senior secured notes, and will use it to pay off part of its credit facility. They are looking to take advantage of the window in the credit markets this summer, an opening that haw been widening by the week. Two weeks ago, PAETEC negotiated a change to its credit agreement allowing it to buy back up to $100M in the market below par and loosened the covenants such that they could sell senior secured notes. Apparently they meant business! I don't know how many of the notes they managed to buy back below par, but with an additional $350M they should be able to make a big dent in the total.
At first I wondered why PAETEC is making such a move now, but I hadn't really looked too deeply into its balance sheet before. They have a $628M credit facility with covenants requiring them to maintain a debt/ebitda ratio of 5:1. With total debt of $930M and first quarter ebitda of $63.9M, they're probably safe but the margin is too thin. This recession left them frozen out of the credit markets and too close to that line for real comfort, and that is probably a big part of why their stock price took such a huge hit over the winter. If quarterly EBITDA had fallen below $50M due to a deteriorating economy, they might have breached their covenants. That didn't happen, they held costs in check, and the danger seems to have passed. Still, they probably didn't like being in any danger at all. Hence, given the opportunity now, they appear to be trying to rid themselves of much of their covenant-heavy debt.
I will be curious to see the pricing, and whether they can sell the full amount. If the price isn't too high, I expect we will see other CLECs and bandwidth providers look to access the credit markets again too. Then some of them can stop talking about M&A and start doing it.
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