Subordinated Debt

[Dutch Hobbyist]

Hi.

I am in the process of selling my business to a US Private Equity Firm and their lender (my source of cash) has provided a term sheet to them for $4 million of sub debt at 13%.

This rate seemed high, and I am wondering what the market is for sub debt these days, and who are the best providers.

I am in the food business, and my revenues and EBITDA levels have trended consistently well, where I bring in apprx $5MM in EBITDA. I will be walking away with about $25MM in my pocket when this is over, and plan on doing a fair bit of hobbying.

Hoping you can steer me in the right direction, as I don't want to approach my CA, as he is not like "us", meaning, he is not a hobbyist.

Thanking you in advance,

DH

 

[Top Northerner]

If you are walking away why worry about the cost of debt unless there is a vendor note. And even then you shouldn't worry unless you believe that they will not be able to carry the debt. And if you have an earn out it should be based on EBITDA which is before interest.

13% is pretty reasonable, it is hard to imagine the rate being lower. If you are selling at 5 times EBITDA, say they are putting in 2 times equity and getting 2 times senior debt and 1 times subordinated debt that is a pretty levered scenario in this market. Make sure your Vendor Note is secured properly as you may end up taking the business back if they default on the other debt ahead of you and you will become the owner again. Not so bad as long as you take enough off the table now.

Good luck and happy hobbying.

 

[Mia.Colpa]

If you can get 5 times EBITDA, take it.

As was said, ensure your note is secured and looks like an ok deal. Congrats.

 

[Dutch Hobbyist]

there is a vendor note and I care, because my son is partners w/ the US private equity firm.

I am doing a "chips off the table" deal so I can hobby alot while I still can.

This is what I have always wanted to do.

 

[Timbit]

13% isn't out of line. You can talk to some other ven cap guys, but I wouldn't be surprised to hear 12 - 15% is normal, even in today's low interest environment simply because money is so tight everywhere still.

Timbit

 

[Dutch Hobbyist]

I should clarify, the 13% is the coupon, there are warrants that allow the CDN based financier to acquire 5% of the company with warrants that make the total cost of the deal around 17%. Plus there is a $265K fee.

 

[OddSox]

I don't suppose you can spare a million or so for a fellow enthusiast? I'll pay you back, honest.

 

[Dutch Hobbyist]

I don't suppose you can spare a million or so for a fellow enthusiast? I'll pay you back, honest.

I don't know you. So, no.

I worked hard all my life, so I can hobby maybe 3 or 4 times a day. My hobby was getting too out of control that I was bringing ladies into a federally inspected meat plant after hours and there was too much risk of being caught.

I could lose my HACCP certifications, so it is better to cash out, while I still can, and I will buy a condo where I will do all of my hobbying.

I wouldn't rule out a "sugardaddy sort of relationship" for the right SP. They would have to be in Maya Blue's or Celest's service level quality however.

 

[adam_a]

DH:

What type of food business are you into? I am in the meat business and am looking to consolidate with a local (GTA) processor.

I am sitting on some cash that needs to be deployed, and I'm looking for good deals. I might even be able to reduce your vendor-note exposure by putting up some more cash up front - if it makes sense.

Let's talk off-line. PM me to discuss.

 

[OddSox]

I don't know you. So, no.

Hey, it couldn't hurt to ask.

 

[Dutch Hobbyist]

Hey, it couldn't hurt to ask.

I would however considering selling you some meat at cost. What do you prefer? Chicken or Beef? Are you able to pick up a trailer load if I send one down to Ottawa? Could you accomodate a full load, or would you prefer LTL?

 

[adam_a]

DH:

Looks like you are in the meat business as well. Where is your facility? (No need for specific addresses).

 

[OddSox]

I would however considering selling you some meat at cost. What do you prefer? Chicken or Beef? Are you able to pick up a trailer load if I send one down to Ottawa? Could you accomodate a full load, or would you prefer LTL?

Um, would you believe I'm a vegetarian?

 

[Dutch Hobbyist]

DH:

What type of food business are you into? I am in the meat business and am looking to consolidate with a local (GTA) processor.

I am sitting on some cash that needs to be deployed, and I'm looking for good deals. I might even be able to reduce your vendor-note exposure by putting up some more cash up front - if it makes sense.

Let's talk off-line. PM me to discuss.

Great. I love getting into partnerships with random guys I meet on escort review boards who fancy asking me essentially who I am.

First off: I am a hobbyist

Second: A successful meat processer.

My vendor note is only $2MM. This is something I can live with, in order to extract my capital.

You watch: CFIA is going to crack down on everyone. MapleLeaf was the tip of the Iceberg when it comes to Listeria. Mark my words. I ran a clean ship for years, however, we always tested above guidelines. Things have changed. I assure you.

If you are serious, we can meet, and I will gladly take your idle cash and assess you, to determine if you are a small fish, or someone worthy or dealing with a guy who has the capabilities of now seeing about 10 or 14 SP's per day.

 

[Rockslinger]

MapleLeaf was the tip of the Iceberg when it comes to Listeria. Mark my words. I ran a clean ship for years, however, we always tested above guidelines. Things have changed. I assure you.

Note to self: Do not eat meat, especially mystery meat. Also, do not eat fish made in China.

 

[Barca]

If you can get 5 times EBITDA, take it.

As was said, ensure your note is secured and looks like an ok deal. Congrats.

Subordinated debt is generally unsecured.

As for the rate, regardless of whether it is subordinated debt or not, that is not what determines the rate. It is the creditworthiness of the issuer. The rate of the note indicates a high yield product meaning there is some risk involved.

I don't know enough about this deal to pass judgement, generally these private equity transactions are considered higher risk to begin with which is why this is the route taken.

 

[Rockslinger]

generally these private equity transactions are considered higher risk to begin with which is why this is the route taken.

Back in the old days we call these things "junk bonds".

 

[Dutch Hobbyist]

Back in the old days we call these things "junk bonds".

I think you need some research. These are issued by CDN banks.

We (I) have been in business for over 32 years and am not levered, which is why a CDN bank is doing it in this economy.

My company employs hundreds of workers in the GTA. Shame on you for suggesting we are involved in something like junk bonds.

 

[Rockslinger]

I think you need some research. These are issued by CDN banks.

Ok, let's call them "High Yield" bonds. Was not referring to your company specially. Sub-debts issued by Canadian banks do not carry a 13% coupon. What is the credit agency rating of your particular sub-debt? Is it BB or higher?

 

[Dutch Hobbyist]

it is a major chartered bank...

we are not issuing the bonds son...

they are using the sub-debt to finance an aquisition...

they are not issued to the public.

Please research your market space. TY.