Staples details $2.75 billion term loan, $3 billion ABL revolver

By Toni Weeks

San Luis Obispo, Calif., Feb. 5 – Staples Inc. entered into a debt commitment letter on Wednesday that provides the company with a $2.75 billion tranche B senior secured term loan facility and a $3 billion asset-based revolving credit facility to finance part of its acquisition of Office Depot Inc.

Bank of America, NA, BofA Merrill Lynch and Barclays Bank plc are providing the financing.

Their commitment to provide the finance is subject to closing of the merger, a minimum excess availability threshold for the ABL facility following the merger and the repayment of some outstanding Office Depot debt, among other conditions.

The financing will also replace Staples’ existing revolving credit facility.

According to an 8-K filing with the Securities and Exchange Commission, the new debt, along with cash on hand, will be sufficient to finance the cash consideration to Office Depot’s stockholders and associated fees and expenses and to refinance some of the debt of both companies.

Office Depot has agreed to use reasonable best efforts to cooperate with Staples in connection with the financing, the filing noted.

Barclays and BofA Merrill Lynch are the joint lead arrangers and bookrunners for the facilities, with BofA Merrill Lynch as left lead for the ABL facility and Barclays as left lead for the term facility.

ABL facility

The ABL loans mature five years after closing of the acquisitions. Borrowing may be made at any date, and letters of credit may also be issued at any time. Loans may be borrowed, repaid and reborrowed, subject to the terms and conditions of the facility. There will be sublimits for borrowings made in Canadian dollars, euros and other currencies.

Up to $750 million of the facility will be available for letters of credit. Each LoC will expire not later than the earlier of 12 months after issuance and the second business day prior to the ABL maturity date.

Of the $3 billion total amount, an aggregate $1.5 billion may be used at closing to issue letters of credit and for revolving loans to finance a portion of the refinancing, finance the consideration for the acquisition, pay related fees and expenses and fund up-front fees or original issue discount provided that, after giving effect to the transactions at closing, and including the assets of Office Depot and its subsidiaries, pro forma excess availability is at least $750 million; if it is at least $1 billion, the borrowers may borrower another $1.7 billion.

The borrowers will be entitles to increase commitments by up to $500 million.

Interest will accrue at Libor plus 150 basis points to 200 bps. All swingline borrowings, however, will accrue at the Base Rate plus 50 bps to 100 bps. In either case, the margin over Libor is based on the company’s quarterly average excess availability percentage.

The commitment fee will range from 25 bps to 37.5 bps, based on average daily utilization. The LoC fee is 12.5 bps.

The borrowing base will be the sum of (i) 90% of the face amount of eligible credit card receivables of the loan parties, plus (ii) 85% of the book value of eligible accounts receivable of the loan parties, plus (iii) 75% of the book value of eligible unbilled accounts receivable of the loan parties for goods that have been delivered, subject to a cap to be agreed upon, plus (iv) 90% of the net recovery percentage (the percentage of the book value of applicable eligible collateral recoverable in an orderly liquidation as determined in the most recent appraisal delivered to the collateral agent) of eligible inventory of the loan parties located in the U.S., multiplied by the book value of such eligible inventory, minus (v) eligibility reserves.

If either the excess availability percentage is less than 10% at any time, excess availability is less than $250 million at any time or an event of default is continuing, until the 30th consecutive day that all such triggers no longer exist, the company must comply with a minimum consolidated fixed-charge coverage ratio of at least 1.00:1.00 for the most recent period of four consecutive fiscal quarters for which financial statements have been delivered.

Borrowers will be required to repay the revolving loans and cash collateralize undrawn letters of credit by the amount, if any, by which the availability is exceeded with 100% of the net proceeds received from the sale or disposition of any ABL priority collateral. Voluntary prepayments are permitted without premium or penalty.

Following the closing date, the ABL loans will be used for working capital and general corporate purposes, including permitted acquisitions and other investments.

The ABL facility will be secured by a first-priority security interest in Staples’ receivables, inventory and other intangibles and investment property and a second-priority interest in substantially all remaining assets of the company, including some real property.

Bank of America is the sole administrative agent, collateral agent and swingline lender for the ABL facility, with Barclays as the syndication agents.

Term facility

The six-year term facility allows for the borrowers to add one or more incremental term facilities or increase the existing facility, in each case up to $1 billion plus additional amounts as long as the borrowers are in pro forma compliance with the loan terms, including a senior secured net leverage ratio that is less than or equal to 2.00:1.00.

Borrowings bear interest at Libor plus 375 bps with a floor of Libor plus 75 bps.

Voluntary prepayments are permitted without premium or penalty unless the term facility is refinanced, repaid or repriced within six months after closing, in which case the repayment will be made at 101% of the principal amount prepaid.

Loans under the facility will be prepaid mandatorily with

• 50% (stepping down to 25% if the senior secured net leverage ratio is no more than 1.50:1.00 and to 0% if it is no more than 1.00:1.00) of the borrower’s annual excess cash flow beginning with the end of the fiscal year ending Jan. 28, 2017, provided that any voluntary prepayments will reduce excess cash flow payments on a dollar-for-dollar basis; and

• 100% of the net cash proceeds of debt issued by the borrower or its restricted subsidiaries, other than debt permitted under the term loan.

The term facility will be secured by a first-priority interest in certain real property and a second-priority interest in the ABL collateral.

Barclays is the sole administrative agent and collateral agent for the term facility, and Bank of America is the syndication agent.

Staples is a Framingham, Mass., retailer of office supplies.

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