Dollar General bond covenants raise concerns but notes trade higher

By Cristal Cody

Prospect News, June 29 - Dollar General Corp.'s new $500 million offering of 4 1/8% senior notes due 2017 contains covenants that cause concerns for a company now enjoying investment-grade ratings, but interest in the issue remains high with the notes stronger in secondary trading, bond sources said.

A "glaring omission" in the bond covenants is the no sale/leaseback agreement for Dollar General, which operates more than 10,000 stores in 40 states, according to a report from Covenant Review, an independent credit research firm.

The no sale/leaseback covenant is "almost always included in an investment-grade style covenant package, and especially with a company with such a large retail store presence, you hope to have that provision included," said Alexander Diaz-Matos, an analyst at Covenant Review, who authored the report.

"Bondholders would be especially concerned about Dollar General just because they have such a high retail store presence and it certainly gives the company additional flexibility to do other financing transactions down the road that might not be bondholder friendly," he said.

In addition to the absence of a sale/leaseback covenant, the issue also had other covenants that raised concerns, including a narrow liens covenant that limits pledging the stock of the company's largest subsidiaries and an equity claw that would allow proceeds from the sales of equity to any person to claw back up to 35% of the bonds, according to the Covenant Review report.

"It's entirely off-market to include that [equity claw] provision in investment-grade style and the way it's drafted gives the company [the opportunity] to redeem the bonds at less than what the bondholders might expect," Diaz-Matos said, noting Dollar General's redemption of outstanding debt with proceeds of its initial public offering in 2009.

The Goodlettsville, Tenn.-based discount retailer plans to use the proceeds from Wednesday's offering to redeem its existing senior subordinated notes due 2017 on July 15.

Although the company's new notes are junk-rated, there "was a lot of interest in these bonds from high-grade accounts," a source said.

Standard & Poor's upgraded the discount retailer's corporate rating to BBB- from BB+ on April 30.

Moody's raised Dollar General's corporate family rating to just below investment grade on April 13 to Ba1 from Ba2 after New York-based investment firm KKR & Co. reduced its equity ownership to less than 50%, which triggered a change in the makeup of the board of directors.

In the secondary market, the new five-year senior notes (Ba2/BB+/) rose to 101.50 bid, 102.25 offered and firmed to a spread of 308 bps bid, 292 bps offered going out on Friday, a trader said.

Dollar General sold the bonds at par to yield 4 1/8%, or a spread of 340.6 bps over Treasuries.

"It's done better. It's up from par and a narrower spread, too," the trader said. "I do see a clear market there."

The company's stock continues to trade near the 52-week high, up 66 cents, or 1.23%, on Friday to $54.39 a share.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.