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A mix of factors influences the decision to restructure debt

When seeking to restructure corporate debt, firms must consider a variety of factors, experts and insiders say.

Lower interest rates, credit quality improvement and other circumstances may converge and push companies toward refinancing, though embarking on a single major project also can make the move desirable or necessary.

Ideally, firms should time refinancing so that they do not wait "until Christmas Eve to go Christmas shopping," says Clifford Smith Jr., Louise and Henry Epstein professor of business administration at the University of Rochester’s Simon Graduate School of Business.

"One potential advantage to refinancing without a gun to your head is that you’ve got more flexibility … to shop around, pick and choose (lenders and loan terms)," says Smith, who teaches economics and finance. "And lenders, knowing that you don’t have a gun to your head, are more likely to pull out a finer pencil in trying to get your business."

Refinancing, the process in which a company reorganizes its obligations by replacing or restructuring existing debt, can occur for various reasons. Firms may want to cut costs by taking advantage of declining interest rates or capitalizing on a strengthened credit rating. Or they might be in outright distress.

Experts note that the timing of refinancing should be tethered to accurate and current financial projections. Careful planning will set the stage for borrowing $10 million once rather than borrowing $1 million ten times, Smith says.

"A good CFO is going to project what internally generated cash (a firm) is going to have, what other obligations they face for things that are coming due," he says.

Canandaigua National Bank & Trust Co. continues to see a small increase in local firms refinancing, says Gary Babbitt, executive vice president of commercial services.

"It started in late 2007, when interest rates started to fall," he says. "And the trend has really continued through 2009 as the economy has struggled toward recovery."

Area firms refinance for various reasons, Babbitt says.

"Some customers seek extended terms to help offset temporary decreases in cash flow, while others seek to conserve cash to pursue longer-term growth strategies," he says.

Local branches of Bank of America N.A. also have seen some companies come forward to refinance debt ahead of its scheduled maturity, says John Pitton, Rochester market president.

"We started to see some of this activity as the credit markets began to open up in the third quarter of 2009, and it’s continued to some extent since then," says Pitton, also senior vice president and senior client manager.

Reasons prompting firms to refinance include expansion, merger or acquisition plans or simply the need for more capital after outgrowing the size of the current credit facility.

Certain best practices in refinancing tend to smooth out the process for both lenders and borrowers, bank officials say.

"I think borrowers should always ask their lenders to provide options when they’re considering refinancing their existing debt," Babbitt says.

Striking a balance between fixed and floating interest rates often has advantages for companies that carry debt.

Besides evaluating the cost-benefit tradeoffs between longer- and shorter-term credit facilities, firms with complicated balance sheets may want to layer the maturity of debt "so that refinancings are spread over several years and not bunched up into one specific year," Pitton says.

He adds: "I probably can’t overemphasize how important it is for a company to stay in constant communication and have frequent meetings with their financial advisers and banks."

Locally, some public firms have turned to refinancing recently. In January, Victor-based Constellation Brands Inc. amended its senior credit facility to extend a portion of its revolving credit facility that was due to expire in June 2011 until June 2013. It also extended $300 million of a $1.2 billion term loan.

In addition, the company gave notice to call without penalty on Feb. 25 all $250 million of its 8.125 percent senior subordinated notes that were due Jan. 15, 2012.

"Our current focus on debt reduction remains unchanged," said Robert Ryder, Constellation chief financial officer, in a statement. "Through strong free cash flow generation and the proceeds from asset sales, we have reduced our leverage and improved our credit profile.

"We decided to take advantage of our current position and improved credit markets to extend these debt maturities and prepay the 2012 senior subordinated notes, which we expect will lower interest expense."

As of the third fiscal quarter, ending Nov. 30, 2009, the company’s debt level had dropped $336 million to $4.1 billion in fiscal 2010. Constellation’s net income in the quarter dropped 47 percent to $44.1 million, compared with net income of $83.5 million a year ago. Net sales fell 4 percent to $988 million from slightly more than $1 billion.

Perinton-based Paetec Holding Corp. also recently restructured $275 million in current debt through a private offering. The offering of senior secured notes paying interest of 8.875 percent and due in 2017 was completed in early January.

Last July, Paetec completed a deal to refinance some $350 million of what was then $600 million in debt. The company sold senior secured notes coming due June 30, 2017, paying 8.875 percent interest.

That rate was three to four points higher than interest the company had been paying on debt, Paetec chairman and CEO Arunas Chesonis said at the time of the deal. But the refinancing would allow the firm to avoid a future credit crunch, he said.

The company had $152.9 million in cash on hand and $920.2 million in debt as of Dec. 31. It repurchased some 1 million shares of its common stock for $3.9 million in the fourth quarter. For 2009, Paetec’s revenues rose slightly to $1.58 billion. Its net loss for the year was $28.7 million, compared with a 2008 net loss of $487.9 million.

Paetec declined interview requests for this article, but spokesman Christopher Muller says the company tries to time refinancing so that it does not occur under pressure.

Another telecommunications firm, Frontier Communications Corp., proceeded with a $600 million bond offering in April 2009. The senior unsecured notes paying 8.25 percent would be due in 2014.

The firm netted roughly $538 million from the sale and used the proceeds to pay down, refinance or buy back existing debt, company documents state.

Frontier posted fourth-quarter 2009 revenue of $521 million, down 4.8 percent from $547.4 million in 2008’s fourth quarter. Fourth-quarter operating income was $157.5 million, and the quarter’s results include a previously announced loss of $53.7 million on the early retirement of debt.

Though many firms here and elsewhere are pursuing refinancing, the Simon School’s Smith says the process has some gray areas that require vigilance and calculation. Firms should note that paying off debt before its stated maturity often triggers penalties or fees.

"Like anything else, the more expensive it is, the more careful you want to be when incurring those costs," he says.

Sheila Livadas is a Rochester-area freelance writer.

3/5/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail [email protected].


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