Financing markets - for home improvement companies - Brief Article - Statistical Data Included

Home Channel News, May 1, 2001

Financing markets open doors to industry -- a crack

As the United States continues to experience a slowing economy, challenging capital markets conditions, reduced leverage multiples, cautious investors and poor financial performance, it is interesting to observe the effect of these variables on the debt financing activity of home improvement / building products companies. These observations serve as a proxy for the industry's debt financing trends -- these include use of asset-based financing structures, selective access to high-yield markets and increased pricing on bank debt refinancing.

Several companies have recently restructured their unsecured senior facilities into asset-based facilities, using a borrowing base calculation of qualifying accounts receivable and inventory. The restructuring usually reduces the amount of capital available and flexibility of financial performance covenants, while increasing the pricing.

The high-yield bond market was dismal for general industrial issuers in 2000. Large communication issuers dominated the primary market, with only six building product issuers accounting for $1.2 billion.

However, in the first quarter of 2001, the market has become receptive to seasoned manufacturing issuers within the industry, although the market demands expensive pricing and, in some cases, requires attached warrants.

U.S. Industries, a manufacturer of building, home and industrial products, is currently refinancing its bank debt. The new facility is expected to price at LIBOR+300 on the Term A (Bank) tranche, and LIBOR+350 on the Term B (Institutional) tranche. The company -- recently downgraded by Standard & Poors and Moody's from a BB+/Baa3 to a BB/Ba2 credit rating due to earnings shortfalls and increasing debt levels -- will pay a significantly higher price than the LIBOR+175 on the old facility.

                  Average debt multiples -- of highly
                    leveraged loans, 1987-2000 [*]
        Non-Bank Debt/EBITDA  Bank Debt/EBITDA  Total
'87             4.7                 4.1          8.8
'88             3.7                 3.5          7.2
'89             3.4                 3.3          6.7
'90             3.4                 2            5.4
'92             2.6                 2.4          5.0
'93             2.7                 2.5          5.2
'94             2.8                 2.5          5.3
'95             3.3                 1.9          5.2
'96             3.5                 2.3          5.8
'97             3.5                 2.1          5.6
'98             3.5                 1.7          5.2
'99             3.3                 1.2          4.5
'00             2.9                 1.2          4.1
4Q '00          2.8                 1.1          3.9
                    High yield transactions--in the
                      building products industry
                          Deal Size
Company                    ($mil.)   Leverage  Yield
DR Horton                   $150       3.3x    10.50%
Lennar Corp.                 325       3.4x    11.25
Dayton Superior Corp.        170       4.2x    13.50
Morrison Knudsen Corp.       300         NA    11.00
Standard Pacific Corp.       125       2.9x     9.50
DR Horton                     50       3.7x     9.88
K. Hovnanian Enterprises     150         NA    11.00
Company                   Use of Proceeds
DR Horton                 Refinancing
Lennar Corp.              U.S. Home acquisition
Dayton Superior Corp.     LBO by Odyssey IP
Morrison Knudsen Corp.    Raytheon E&C acqusition
Standard Pacific Corp.    Refinancing
DR Horton                 Refinancing
K. Hovnanian Enterprises  Refinancing

(*.)Notes: Criteria -- pre-1996 = L+250 and higher; 1996-2000 = L+225 and higher. Media and telecom loans excluded. There were too few deals in 1991 to form a meaningful sample.