| Obligor profile | ||||
|---|---|---|---|---|
| Restructuring date | December 2024 | |||
| Post-exchange rating/outlook | CCC+/Negative/-- | |||
| Location/Primary industry/GICS | U.S./Consumer Products/Personal Care and Beauty Products: Producers | |||
| Post-exchange total reported debt (change) | 717 (36) | |||
| Sponsor/owner | Kainos GP II LLC | |||
| Forecasts (fiscal 2024) | ||||
| Liquidity ratio (x)/Assessment: | 2.4/adequate | |||
| Debt to EBITDA* (x) | 8.4 | |||
| EBITDA to total interest* (x) | 1.2 | |||
| EBITDA to cash interest* (x) | 1.6 | |||
| *Adjusted by S&P Global Ratings. GICS--Global Industry Classification Standard. Source: S&P Global Ratings. | ||||
Transaction Summary
Restructuring type: priming loan exchange
In December 2024, KNS announced a pending acquisition for $177.5 million plus an earnout of up to $22.5 million in 2026. The acquisition was financed through a combination of $100 million in equity from sponsor Kainos GP II LLC and $120 million in super senior financing provided by existing lenders. The acquisition closed Jan. 7, 2025.
The acquisition was part of a comprehensive capital structure transaction that involved the restructuring of KNS’ existing funded debt. The existing lenders agreed to make concessions on their existing loans, including interest rate reductions, maturity extensions, and principal discounts on existing term loan debt.
The $75 million revolving credit facility had approximately $50 million outstanding pre-transaction; $25 million was repaid in cash at close, with the remaining $25 million outstanding taking back second-out term loans at par.
First-lien term lenders exchanged their pre-transaction holdings for a combination for first-out and second-out term loans at a blended discount rate of approximately 16.5%.
The $11 million non-fungible first-lien term loan was exchanged at par for the first-out term loan, resulting in what we would consider a “non-ratable” transaction because lenders’ recovery prospects are not diluted by taking back second-out term loans post-transaction.
Second-lien lenders exchanged pre-transaction holdings for third-out term loans at a 29% discount to par.
While the acquisition and debt restructuring improved KNS’ liquidity and maturity profile and gave it more time to execute its growth strategy, our ‘CCC+’ issuer credit rating on the company indicates that we believe another default is more likely than not.
| KNS Holdco LLC --Original debt structure | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Original debt structure:: | Exchange prices | Effective ranking in waterfall | Maturity (year) | Rate (%) | Principal (mil. curr) | Pre-exchange prices* | Recovery estimates (%) | |||||||||
| $75 million first-lien RCF | 100 | 1 | 2026 | S+550 | 30 | N.A. | 60 | |||||||||
| First-lien term loan | 83.5 | 1 | 2027 | S+500 | 558 | 63.1 | 60 | |||||||||
| First-lien PIK notes | 74 | 1 | 2028 | 11 PIK | 37 | N.A. | 60 | |||||||||
| Second-lien PIK notes | 71 | 2 | 2028 | 9.25 PIK | 98 | N.A. | NR | |||||||||
| Non-fungible TL | 100 | 3 | 2028 | 4 PIK | 10 | N.A. | NR | |||||||||
| *Prices are based on indicative mid-price. RCF—Revolving credit facility. PIK—Pay in kind. TL—Term loan. N.A.—Not available. | ||||||||||||||||
| KNS Holdco LLC --Post-exchange debt structure | |||||||
|---|---|---|---|---|---|---|---|
| Post-exchange debt structure: | Exchanged from* | Effective ranking in waterfall | Maturity (year) | Rate (%) | Principal (mil. curr) | Prices (on 12. 27, 2024)* | Recovery estimates (%) |
| $50 million first-lien first-out RCF | RCF due 2026 | 1 | 2029 | S+500 | 0 | N.A. | 95 |
| First-out term loan | New money, 1L TL | 1 | 2030 | S+500 | 230 | 100.5 | 95 |
| Second-out term loan | 1L TL | 2 | 2030 | S+625 | 404 | 78 | 45 |
| Third-out term loan | 2L TL | 3 | 2030 | S+750 | 82 | N.A. | 0 |
| Unsecured notes | N/A | 4 | 2028 | 4 PIK | 10 | N.A. | 0 |
*Prices are based on indicative mid-price. RCF—Revolving credit facility. 1L—First lien. 2L—Second lien. TL—Term loan. S--Secured overnight financing rate. N.A.--Not available. NR--Not rated. Source: S&P Global Ratings.
Transaction Mechanics
The lenders under the new credit agreement benefit from an expanded collateral package (including the addition of former non-obligors and the recently acquired entities as guarantors, pledges of 100% of the equity interests of first-tier foreign subsidiaries of loan parties, and perfected security interests in deposit accounts), additional reporting requirements, tightening of certain covenants, and the inclusion of certain protections against future liability management exercises.
Impact On Recovery
Our estimated enterprise value at emergence (which is largely consistent with our pre-exchange valuation) is sufficient to fully cover the reduced first-out claims, with sufficient spillover to provide second-out claims the expectation for average (30%-50%; rounded estimate: 45%) recovery in the event of payment default. This compares with pre-exchange recovery expectations on first-lien debt of 60% and an overall reduction in recovery expectations for pre-exchange first-lien lenders of 15%.
Impact On Liquidity
Following the exchange, we revised our assessment of KNS' liquidity to less than adequate from weak because we expect its sources of cash will be 1.8x its uses over the next 12 months pro forma for the company’s proposed distressed debt exchange and recent acquisition. Although these sources-to-uses coverage levels could support a higher assessment, we believe KNS exhibits less than adequate liquidity because we do not believe the company would be able to absorb a high-impact, low-probability event without refinancing or restructuring its debt. Moreover, our estimate of EBITDA cushion on the company’s springing first-lien net leverage covenant remains below 10%, and we do not believe the company has a generally satisfactory standing in credit markets, as evidenced by its debt capital markets activity this year. We also do not believe the company’s risk management is commensurate with an adequate liquidity profile.
This report does not constitute a rating action.
| Primary Contact: | Olen Honeyman, New York 1-212-438-4031; olen.honeyman@spglobal.com |
| Secondary Contact: | Ryan O'Toole, Chicago 1-3122337005; ryan.otoole@spglobal.com |
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