Sunday, September 25, 2016

Sequa Corp Failing after a Decade Under PEU Management

Carlyle purchased Sequa Corporation in December 2007 when private equity firms paid premium prices to buy companies.  That debt is coming due.  Bloomberg reported:

All of Sequa’s debt is due next year, according to Standard and Poors, starting with its $1.3 billion term loan in June 2017, followed by $350 million of bonds in December.
At the time of Carlyle's purchase Sequa had $2.19 billion in revenues and $700 million in debt, which Carlyle assumed as part of the $2.7 billion deal.

Sequa had "six businesses with leading positions in niche markets," according to Carlyle's website.  Forbes story on the $2.7 billion buyout said Sequa had seven divisions.  It's down to two today with annual revenues of $1.3 billion.

CNBC reported on Carlyle's buyout:

The Sequa deal, expected to close in the fourth quarter, will be financed through a combination of equity contributed by investment funds affiliated with Carlyle, and external debt financing provided by Lehman Brothers, Citigroup and JP Morgan.  
The Lehman-Carlyle-Sequa link is reflected in the 2012 board bio:

Mr. Adam J. Palmer is a Managing Director of Carlyle and has been the Head of the Global Aerospace and Defense sector team since 2011. Mr. Palmer joined Carlyle in 1996 as a member of the Aerospace, Defense and Government Services sector team. Prior to joining Carlyle, Mr. Palmer was with Lehman Brothers focusing on mergers, acquisitions and financings for defense electronics and information services companies. He currently serves on the board of directors of Wesco Aircraft, RPK Capital Management Group, LLC, Sequa Corporation, Triumph Group, Inc. and Landmark Aviation, and previously served on the board of directors of Standard Aero, Ltd., U.S. Investigations Services, Inc. and Vought Aircraft Industries, Inc. 
Since 2012 Palmer landed board seats at Global Jet Capital, Dynamic Precision Group and Novetta Solutions LLC.

Mr. Palmer could tell us what happened to four or five Sequa businesses since Carlyle bought the company.  The board sold Sequa Automotive Group for $400 million in 2012.  It's not clear what Carlyle did with the proceeds.

Sequa 2007 was a thriving company with numerous divisions in growing niche industries.  After nearly ten years of Carlyle Group ownership it's a stressed shell of its former self.

Carlyle put $1.01 billion of investor money into the 2007 buyout of Sequa, according to fund marketing documents viewed by Bloomberg News.
SEC filings on the buyout show the mix of equity and debt.  Carlyle borrowed $2 05 billion to seal the deal.

Equity Financing - It is expected that up to $900 million of the Merger consideration will be provided through the issuance by Parent of common equity to Carlyle Partners V, L.P. and certain of its affiliates and co-investors. 

Debt Financing - Parent has received a debt commitment letter, dated as of July 8, 2007, from Lehman Brothers Inc., Lehman Commercial Paper Inc., Lehman Commercial Bank, Citigroup Global Markets Inc., JPMorgan Chase Bank, N.A. and JPMorgan Securities Inc. (collectively, the “Banks”), which provides the following, subject to the conditions described below: 
 • a $1.2 billion senior secured first lien term loan facility (the “First Lien Term Loan Facility”); 
 • a $150 million senior secured revolving credit facility (the “Revolving Facility” and together with the First Lien Term Loan Facility, the “Senior Facilities”); and 
 • $700 million aggregate gross proceeds of unsecured senior notes
Moody's shows current debt levels of $1.76 billion

$1,228 million (outstanding) senior secured term loan due 2017, downgraded to Caa3 (LGD3) from Caa1 (LGD3)
$175 million senior secured revolver due 2017, downgraded to Caa3 (LGD3) from Caa1 (LGD3)
$350 million senior unsecured notes due 2017, downgraded to C (LGD5) from Ca (LGD5) 
Carlyle "grew" Sequa down nearly $900 million in annual revenue over a nine year period while retiring/offloading $254 million in debt.   Company wide revenue declined 41%, while debt decreased 12.4%.

I wonder how the family of founder Norman Alexander feels about the deal with Carlyle today.  They might want to give the Brinton's clan a call.

Update 4-5-17:  Carlyle bought back $235 million in Sequa debt for pennies on the dollar.  It still may not be enough for new lenders to rescue Sequa in which case Carlyle's debt holdings would turn into equity.  Sequa's implosion may give a smidgen of satisfaction to the Brinton's family.