Rockwood Specialties: High-Yield Debt Issue
22 Pages Posted: 21 Oct 2008
In November 2000, Kohlberg, Kravis, and Roberts (KKR) purchased Rockwood Specialties, Inc., a specialty chemicals company, in a $1.2 billion buyout. Spurred by the favorable market conditions in the first half of 2003, KKR was contemplating refinancing its buyout debt in June 2003. Merrill Lynch, its underwriter, proposed to refinance the earlier funding, in part, with a $375 million issue of senior subordinated notes. Although there had been a favorable interest-rate environment and a strong volume of debt issuance in the first half of 2003, the Rockwood offering still posed some significant challenges. First, it was a first-time issue by a privately held company. Second, KKR's motivation for the offering and the complex financial structure surrounding it had resulted in a preliminary credit rating of Caa from Moody's. Students are asked to evaluate and price the high-yield issue. The case discusses how credit ratings, market conditions, and organizational structure affect bond yields. There is a brief history of how the high-yield market evolved from the mid-1980s through 2003.
Rev. Sept. 14, 2009
ROCKWOOD SPECIALTIES: HIGH-YIELD DEBT ISSUE
In November 2000, Kohlberg, Kravis, and Roberts (KKR) purchased Rockwood Specialties Group, Inc. (Rockwood), a specialty chemicals company, in a $ 1.2 billion buyout from Laporte plc, a U.K. conglomerate. Some of the financing used to complete the buyout had been on less-than-desirable terms at that time, and now spurred by the favorable interest-rate environment and a strong volume of debt issuance in the first half of 2003, KKR had begun to contemplate refinancing a significant portion of the buyout debt. In June 2003, Merrill Lynch proposed a $ 375 million offer of senior subordinated notes and a $ 435 million term loan to refinance the buyout funding. Although KKR was eager to improve Rockwood's financial position, the offering posed some significant challenges. First, it was a first-time issue by the privately held company. Second, while the U.S. economy showed signs of improvement in 2003 following two years of recession, the outlook remained guarded. Third, KKR's motivation for the offering and its complex financial structure complicated the potential credit rating that the issue would receive and therefore, the pricing of the issue. To date, Moody's had been willing to assign a preliminary rating of only Caa to the issue, a rating that Merrill Lynch believed would make it difficult to sell. Nonetheless, KKR was determined to proceed with the issue and see what the market would bear.
KKR's Purchase of Rockwood Specialties
KKR was a key player in the U.S. leveraged-buyout (LBO) market. Since its founding in 1976, it had completed 110 transactions involving more than $ 114 billion of total financing. Some of KKR's noteworthy deals included Wometco Companies (the first billion-dollar buyout, in 1984), Beatrice (the first hostile takeover against a Fortune 500 company; $ 8.7 billion in 1985), and RJR Nabisco (the largest LBO in history—$ 31.4 billion in 1988). Traditionally, buyout groups looked for companies with strong, stable cash flows whose operations could be improved. Those features were important in helping to pay down the high buyout debt.
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Keywords: bonds, securities
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