Rodan + Fields has received consent from substantially all lenders on its
proposed non-pro-rata uptiering debt exchange, all but ruling out the possibility of a minority lender group challenging the transaction, according to sources.
The closing of the multilevel marketing cosmetics company’s liability management exercise marks a new chapter for so-called creditor-on-creditor violence. It breaks away from the pattern of five similar previous deals, namely Serta Simmons, Boardriders, TriMark, Incora and Mitel, where minority lenders brought lawsuits to protect their rights. The Rodan deal, discussed in detail below, also shows innovation in liability management technology and how dealmakers figure out mixing
carrots and sticks to minimize holdout risk and encourage participation.
Initial term lenders get to roll up $105 million, or 3.5x the $30 million new-money contribution, at par into a S+700 bps + 10 bps CSA second-priority loan due May 31, 2027, according to sources. The lenders will receive a 5% PIK commitment premium, or $1.5 million. The initial lenders will also swap the remaining loans not rolled up for new third-out priority loans at a discount of 17.5%. Additional participants got to swap their holdings for the third-out loans at a discount of 27.5% before the early consent deadline of April 17, or at a discount of 32.5% before the consent deadline.
Lenders who participated in the transactions before the early consent deadline would receive a 0.75% fee, with 50% paid within two business days after the effective date, 25% paid in September and 25% paid in December, the sources said. No fees would be paid to lenders who participate after the early consent deadline. Participating lenders who rolled up into the second-out loans would also receive 10% equity previously held by TPG, and those who rolled up into the third-out loans would get 2.5% of equity held by TPG, if they consented before the early deadline.
The second-out and third-out loans amortize at 1% annually, according to sources. The third-out loan has a make whole of 17.5% of any portion of the original principal accelerated after payment or bankruptcy.
Any loans that do not participate in the transaction are subject to restrictions on future repurchases, refinancing into the third-out loan, prepayment or exchanges, the sources said. Any such transactions in the future cannot include a discount rate more advantageous to lenders than as provided to participating lenders. Such discount rate restriction becomes more punitive 91 days after the current deal closes, on a rolling scale. Before Jan. 15, 2025, the purchase price of any prepayment cannot exceed 35%, and pro forma liquidity after giving effect to such repurchase or repayment cannot drop below $85 million.
Existing revolver lenders committed to a $50 million S+350 bps first-out superpriority revolver due May 1, 2027, according to sources. The company swapped $50 million outstanding on the old revolver for new third-out S+775 bps +10 bps CSA extended term loans due May 31, 2027. For the third-out loans, Rodan has the option to pay in kind 40% of the facility during the third and fourth quarters this year and the first quarter of 2024, and the PIK rate is S+850 bps, subject to a pro forma liquidity test. The revolver includes a 0.5% fee on the old $200 million revolver commitment, with 50% paid within two business days after the effective date, 25% paid in September and 25% paid in December.
The new debt has a lien on enhanced collateral package on substantially all the assets, including acquired assets in the future, all the intellectual property associated with new products or associated assets including inventory, equity of foreign subsidiaries and intellectual properties, the sources said. The facility also includes a $25 million liquidity covenant tested monthly, starting in December 2023 through June 2024, and the test steps up to $30 million after that. It also has a $65 million LTM minimum EBITDA covenant tested quarterly, starting in December 2023.
Pro forma for the current transaction, if 100% of existing lenders participate, the new capital structure includes a $50 million revolver with $16 million outstanding, $137 million of second-out loans and $415 million of third-out loans, according to sources.
Rodan + Fields and minority sponsor TPG did not respond to requests for comment.
--Harvard Zhang