ServiceMaster Restructuring

Downers Grove, IL,-- ServiceMaster is one of the latest companies forced to restructure the financing for its leveraged buyout, as bond investors resist some of the riskiest types of debt from heavily leveraged companies, according to analysts and sources.

ServiceMaster in March accepted a $4.7 billion takeover bid from a group led by private equity firm Clayton, Dubilier & Rice Inc.

To finance the acquisition, the company had initially planned to sell $3.8 billion in debt, which included $1.15 billion in toggle payment-in-kind (PIK) notes, said Robert Lee, analyst at KDP Investment Advisors, an independent research company in Montpelier, Vermont.

Investor reticence toward this kind of note, however, led them to reduce the PIK component to 50 percent, he said. The remainder of the bond issue will now be bonds that have cash interest payments.

ServiceMaster and Clayton, Dublier & Rice were not immediately available for comment.

Payment-in-kind bonds allow issuers to either make payment in cash or by issuing additional debt.

"I think people are concerned that once these companies get to the point where they have to use the PIK option, they're basically saying that they can't service their debt with their current cash flow," Lee said. "So they see that as a sign of problems at the company, or too much leverage."

"The problem with them is you largely put off paying your interest, then that automatically increases your outstanding principal, so it sort of delays the day of ultimate reckoning," he said.

ServiceMaster's restructuring comes as some high-yield borrowers are struggling to place deals as investors balk at high levels of leverage in a market already shaken up by concerns about possible contagion from residential mortgages.