Orchard Supply Hardware extends portion of term loans, raises pricing

By Angela McDaniels

Tacoma, Wash., Dec. 29 - Orchard Supply Hardware Stores Corp. subsidiary Orchard Supply Hardware, LLC amended its senior secured credit facilities on Dec. 22, according to an 8-K filing with the Securities and Exchange Commission.

Orchard Supply Hardware Stores plans to transition to a publicly traded company independent from Sears Holdings Corp.

The company said it renegotiating the financing arrangements and monetized additional owned store properties, through asset sales and/or sale-leaseback transactions, in order to strengthen its ability to remain in compliance with its covenants while continuing to follow its current business plan, which includes plans for store expansion.

Term loan B amended

Orchard Supply Hardware amended its $200 million term loan B to

• Extend the maturity of a portion of the loans to Dec. 21, 2015 from Dec. 5, 2013. Lenders holding about 65% of the loans agreed to this extension;

• Increase the interest rate for the extended loans to Libor plus 575 basis points;

• Impose a 1.25% Libor floor for the extended loans;

• Impose pay-in-kind interest on the extended loans at a rate of 3% per year compounded annually;

• Allow future extensions of the remaining term loans and allow terms loans to be refinanced. If the future extended or refinanced term loans have a yield that is 25 or more bps greater than the all-in yield on the term loans extended on Dec. 22, the all-in yield of the latter will be increased to equal the yield on the former;

• Allow the borrower to purchase outstanding term loans on a non-pro rata basis at less than par in a modified reverse Dutch auction purchase offer, provided that the purchased loans will be canceled within 10 business days of purchase;

• Require a $34.4 million prepayment on the extended loans on the closing date of the amendment;

• Require a mandatory prepayment with 75% of the net cash proceeds of any disposition by OSH Properties LLC that is not used to pay real estate debt;

• If the borrower's ratings are below B3/B- or if the borrower is no longer rated, then the percentage of excess cash flow required to prepay term loans will increase to 100% and the PIK interest rate will increase to 4% per year;

• Increase the maximum adjusted leverage ratio to 6 times for the fourth quarter of fiscal 2011 and first quarter of fiscal 2012. This will step down to 5.75 times for the four quarters ending with the first quarter of fiscal 2013, to 5.25 times for the four quarters ending with the first quarter of fiscal 2014, to 5 times for the four quarters ending with the first quarter of fiscal 2015 and to 4.75 times for the remainder of the term;

• Limit the borrower's ability to make capital expenditures (net of tenant improvement allowances and landlord contributions) to $22.5 million in fiscal 2012, $25 million in fiscal 2013, $27.5 million in fiscal 2014 and $30 million in fiscal 2015;

• Provide the lenders with the ability to exchange term loans for qualified subordinated PIK debt, which will mature six months after the maturity of the extended term loans;

• Increase the amount of term loans that permitted debt holders (other than Ares Capital Markets Group) may hold to 25% of the aggregate outstanding amount of term loans at the time of the acquisition; and

• Amend the definition of change in control to update the pre- and post-IPO prongs with a reference to the spin-off of the company's equity interests.

Other facilities amended

The lenders under the subsidiary's ABL revolving facility consented to the increased pricing on the extended term loans and gave the borrower the ability to have qualified subordinated PIK debt outstanding in exchange for term loans.

Under an amendment made to the ABL revolver on Dec. 22, the subsidiary is now required to satisfy a liquidity test in order to make voluntary prepayments of term loans or cash interest payments on qualified subordinated PIK debt.

On Tuesday, OSH Properties amended its real estate term loan to increase the margin over Libor to 575 bps from 425 bps.

The companies must pay amendment fees to the lenders under each facility.

JPMorgan Chase Bank, NA is the administrative agent for the term loan B. Wells Fargo Bank, NA is the administrative agent for the other facilities.

The company operates retail hardware supply stores and is based in San Jose, Calif.

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