Griffon Corp walks away from refi after investors demand 6.75%, touts growth story to underpin delevering

Following Griffon Corp’s withdrawal of a proposed bond deal from syndication last week, investors are scrutinizing the company’s strategy for addressing its 2022 maturity, said four sources tracking the situation. The 6.1x-levered issuer’s decision to postpone the refinancing – citing unattractive pricing – comes at a time when the high yield market is relatively tight by recent historical standards, they said.

Lead Deutsche Bank opened price whispers on the proposed USD 500m unsecured notes due 2027 in the 6.375% area, but investors pushed for pricing closer to 6.75%, according to two of the sources.

Proceeds from the opportunistic deal would have gone toward refinancing half of the home products and electronics company’s USD 1bn 5.25% unsecured notes due March 2022, which represents its only debt other than a revolver due 2021. “We decided not to move forward at this time with the pricing offered,” said Ronald J. Kramer, Griffon’s CEO, in Friday’s press release.

However, comps like similarly levered, similarly-rated Compass Group Diversified Holdings unsecured bonds are in the high 6% area, sources noted. Compass’s USD 400m 8% senior unsecured notes due 2026, levered 5.9x, last traded on 6 May at 104.375 to yield 6.728%, in line with recent levels, according to MarketAxess. The bonds are rated B3/B- compared to the B2/B+ ratings assigned to Griffon’s new offering.

Griffon’s existing 5.25% notes traded on Friday at 99.75 to yield 5.344%, down slightly from trades in 100-100.25 range on 7 May – but up from trades in the 96-97 area yielding 6.33%-6.7% the last week of January, according to MarketAxess.

Meanwhile, the average spread over Treasuries for high yield bonds in the ICE BofAML US High Yield Index, at 401bps as of this morning, is only slightly wider than a five-year low of 322bps last October – and down from a recent peak of 544bps in December.

The overall market also deteriorated over the course of today’s trading session as the trade war with China escalated, a trend some investors suspect will continue throughout the year. In response to President Trump’s decision to apply new tariffs to Chinese goods, Beijing announced this morning that it will increase tariffs on USD 60bn worth of US goods.

The news sent both high yield and equity markets down today, noted a buysider and a trader. The S&P 500 high yield corporate bond index closed down about a point today to 872, while the Dow closed down more than 600 points.

“Theoretically, assuming that spreads remain in this general area, the company could bring the deal back after showing more growth and performing history for its recent acquisitions, but I’m not sure how much tighter that would bring the pricing,” one of the sources said. “But that’s putting a lot of faith into spreads and the market overall being conducive to a deal later on in the year or even at the beginning of next.”

The company’s capital structure consists of the notes and a USD 350m revolving credit facility due 2021, which had USD 158m of outstanding borrowings as of 31 March.

“Based on where the existings are and where Compass is, I would’ve thought that company would be fine with going to 6.75%. Personally, I prefer Compass because its leverage is lower and its businesses are more diversified,” one of the sources said.

As of 31 March, Griffon was levered at 6.1x based on USD 201m of LTM adjusted EBITDA and USD 1.229bn of total debt. Liquidity stood at USD 234m, based on USD 58m of cash and USD 176m of revolver availability.

Sources expect the company to generate USD 61m of free cash flow (5% of debt) in fiscal year 2019 ending 30 June, based on growth in adjusted EBITDA to USD 236m, less USD 61m of interest expense, USD 46m of capex, a USD 50m dividend and USD 18m of taxes.

On the company’s last earnings call earlier this month, Kramer emphasized that the company would delever through its focus on acquisitions and EBITDA growth, rather than debt paydowns.

“Our efficiency initiatives and business integration plans will contribute to enhanced long-term free cash flow generation, which will drive our deleveraging efforts over the next few years,” Kramer said.

Griffon can be broken down into two segments: home and building products (85% of LTM 31 March revenue) and defense electronics (15% of LTM revenue). The company has recently made a couple of acquisitions in its home and building products segment.

In October 2017, Griffon acquired ClosetMaid for USD 185.7m, a manufacturer of storage and organization products and in June 2018, CornellCookson, a steel door and grill products manufacturer, for USD 170m. ClosetMaid generated USD 300m in revenue in the first twelve months after acquisition, while CornellCookson is expected to generate USD 200m in annual sales, according to company filings.

“Though not cohesive, Griffon’s products are diverse and the brands that they acquired are well-known with market share, so that was a smart move for them,” one of the sources said, referring to the recent acquisitions.

In the offering memorandum for the recently-pulled bond, Griffon noted that making strategic acquisitions is an important part of its growth plan. “As global economic conditions improve, we will continue to seek out, evaluate and, where appropriate, acquire additional businesses in the [Home Building Products] and Defense Electronics markets that can benefit from our global distribution channels and offer potentially attractive returns on capital,” the company noted in the OM.

Griffon and Deutsche did not respond to requests for comment.

2019 Debtwire

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