HD Supply ends Q2 with $946 million liquidity, no near-term maturities

By Paul Deckelman

New York, Sept. 10 - HD Supply Holdings, Inc. raised $1 billion via a successful initial public offering during its recently completed 2013 fiscal second quarter and used the proceeds to take out a big chunk of high-coupon junk bond debt, allowing it to meaningfully cut its overall debt load from the beginning of its fiscal year.

And the Atlanta-based industrial products distributor, which has been active in the capital markets all year, has pushed out its bond and bank debt maturities to 2019 and 2017 at the earliest, respectively, and ended the quarter with what its chief financial officer, Ronald J. Domanico, called "significant liquidity" of $946 million, consisting of $109 million of cash and cash equivalents and $837 million of available borrowing capacity under the company's senior secured asset-based lending facility.

Domanico, who also is HD Supply's senior vice president, told analysts on the conference call following the release of the company's results for the fiscal second quarter ended Aug. 4 that the company used the IPO proceeds to redeem all $950 million of its outstanding 10½% senior subordinated notes due 2021, which will save the company about $100 million annually in interest expense.

"We continue to evaluate our options to economically reduce our debt balance while at the same time focusing on adjusted EBITDA growth," the CFO declared.

Debt sharply lower

At the end of the fiscal second quarter, HD Supply's gross debt stood at $5.69 billion, all but $10 million of that considered long-term debt less current installments. With the $109 million of cash on the balance sheet, its net debt was $5.58 billion. In contrast, gross debt as of the end of fiscal-year 2012 on Feb. 4 stood at $7.33 billion, consisting of $6.43 billion of long-term debt and $899 million of current installments. With $141 million of cash and equivalents, the fiscal year-end net debt totaled $7.19 billion.

The takeout of the 10½% notes using the IPO money was only the latest in a series of capital markets transactions this year that have cut the debt load and pushed out the maturities.

In January, the company sold the 10½% notes, upsizing the quick-to-market offering from an originally planned $650 million and pricing the paper at par on Jan. 9. With the coming IPO in mind, the notes' indenture was crafted with a special equity clawback allowing the full issue to be redeemed at 104 after July 31, which is what ultimately did happen. Proceeds from those notes were meanwhile used to redeem the last $888.9 million of its 13½% senior subordinated notes due 2015 that were still outstanding following a previous redemption of $930 million of those notes last fall. Both of those redemptions took place at a price of 103.375.

Just three weeks after doing the 10½% notes deal, HD Supply paid a return visit to Junkbondland, selling $1,275,000,000 of 7½% senior notes due 2020 in a quick-to-market deal that priced at par on Jan. 29. Proceeds from that transaction were used to redeem the $757 million of 14 7/8% senior notes due 2020 that it had sold in April 2012.

The company then used the IPO proceeds to redeem all of the 10½% notes that it had sold in early January plus a portion of its 11½ senior notes due 2020 that it had sold last year.

Besides the bond market transactions, the company visited the bank debt market in March to reprice its $1 billion term loan on more favorable terms, reducing the interest rate to Libor plus 325 basis points with a 1.25% Libor floor versus the previous terms of Libor plus 600 bps with a 1.25% Libor floor.

After all of the bond market wheeling and dealing, at the end of the fiscal second quarter, the company's roughly $5.7 billion capital structure consisted of $500 million drawn on its ABL facility and $969 million of outstanding term debt, both due in October 2017; $1.27 billion of 8 1/8% senior secured first-priority notes due April 2019; $675 million of 11% senior secured second-priority notes due April 2020 and the two senior unsecured junk issues - $1 billion of 11½% notes and $1,275,000,000 of 7½% notes, both due in July 2020.

Debt redemption not priority

During the question-and-answer portion of the conference call that followed the formal presentations by company president and chief executive officer Joseph J. DeAngelo and by Domanico, an analyst inquired about the company's plans for further debt reductions versus using its cash flows to pursue growth initiatives. The CFO said that the company's strategy "hasn't changed at all," giving two reasons.

The first, he said, is "we continue to have significant opportunities to invest in our high-return initiatives, and that investment level is continuing as it has in the past and will continue."

The second factor, he said, is that "the premium to take out the remaining debt on the balance sheet is quite expensive, and we continue to evaluate that on an ongoing basis."

"For the short term," he continued, "the investment will be in the high-return growth initiatives and we will delever through the growth in adjusted EBITDA."

However, Domanico did point out that the notes begin to become callable in April 2015 and the term debt is meanwhile callable without penalty, "so we do have alternatives. But right now, the primary use of the cash will be reinvestment in these high-return initiatives."

The latter, he said, "have returns in excess of our weighted average cost of capital."

Sales, adjusted income up

During the quarter, the company reported that net sales grew to $2.25 billion, an increase of $198 million, or 10%, from $2.05 billion in the second quarter of fiscal 2012.

The net loss for the latest second quarter was $72 million, which included a $46 million loss the company took on the extinguishment and modification of debt arising from the debt redemption done with the IPO proceeds. The year-ago red ink was $56 million, but excluding the debt-extinguishment related loss, the overall net loss in the 2013 quarter improved by $30 million from a year earlier.

Excluding one-time items, adjusted net income increased by $33 million in the latest quarter to $36 million, or 23 cents per diluted share, from $3 million in the second quarter of fiscal 2012, or 2 cents per share. HD Supply said that the improvement was attributable to sales growth, improving gross margins and a reduction in interest expense.

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