Asset-based loans historically have been used in restructurings and turnarounds, but increasingly companies with strong financial performance are choosing asset-based loans to fuel their growth strategies. Bumble Bee Holdings LP is a case in point. Bank of America Business Capital recently underwrote a $125 million revolving credit facility to support the combination of Bumble Bee’s U.S. and Canadian operations with Connors Bros. Income Fund in a deal that created the largest branded seafood company in North America. Connors Bros. Income Fund is a Canadian income trust investing in Connors Bros., the world’s largest producer of canned sardines and one of the oldest food companies in Canada. With Bumble Bee operating significantly ahead of plan and a combined pro forma EBITDA of nearly $70 million, the combined company could have opted for a cash flow loan to support the transaction. However, the operational flexibility that an asset-based loan provides proved to be an important component in this noteworthy deal. A merging of interests Centre Partners Management LLC acquired Bumble Bee in May of 2003 from ConAgra Foods Inc. in a leveraged buyout. Bumble Bee was the second-largest seller of canned tuna in the U.S. and No. 1 in canned salmon, but its goal was to become the leader in the overall canned seafood category. Bumble Bee since has gained market share in several product categories, divested non-core assets, and shifted production to more cost-effective operations. As a consequence, the business proved to be more profitable much sooner than had been envisioned. Although Centre Partners typically holds its investments for five to seven years, the private equity sponsor saw an opportunity to realize a significant return on its investment while maintaining a sizeable interest in the seafood company, given Bumble Bee’s strong financial performance. With considerable experience in the seafood industry, Centre Partners was well aware of Connors. At one point in the past, Connors and Clover Leaf Seafoods LP, Bumble Bee’s Canadian subsidiary, were affiliated under a common owner. While Bumble Bee and Connors had some overlap in the value-oriented canned sardine market, the combination of the two businesses yielded a company with the No. 1 or No. 2 market share in nearly every major category of canned seafood in the U.S. and Canada. Given that their product lines were complementary, their manufacturing and distribution processes were similar, and they had many of the same retail customers, the two companies were a good strategic fit. Beyond that, Centre Partners and Bumble Bee were interested in Connors because of its corporate structure as a publicly traded Canadian income trust. Canadian income trusts have become increasingly popular for developed companies that generate modest top-line growth and high, stable free cash flows. Income trust units provide investors with monthly dividends and offer a current yield typically between 7.5% and 10.5%. Due to their attractive free cash flow profiles, low leverage, and high yields, Canadian income trusts often trade above seven times EBITDA. This makes them an appealing capital markets solution for many issuers, particularly those backed by private equity funds. A merger with Connors would allow Centre Partners to realize a significant return on its investment while maintaining a meaningful stake in the combined company, and enable both companies – each a leader in the North American market for more than 100 years – to fulfill their respective goals of becoming the leading supplier of seafood in the U.S. and Canada. Creative and complex The asset-based transaction included an approximate $190 million secondary equity offering by Connors along with a $90 million revolving line of credit in the U.S. and a $35 million ($46.5 million Canadian) revolver in Canada. As is typical in these kinds of deals, the money that was raised was used to fund the acquisition, refinance all of Bumble Bee’s and Connors’ existing debt, and provide working capital for the new company. However, there were a number of unusual aspects to this deal. It was structured so that the management team of Bumble Bee would stay in place, Centre Partners would retain approximately a 32% interest, and Connors’ public unit holders would emerge as the majority shareholders. Adding to the complexity of the deal was the cross-border nature of the combination. Usually, when there is a U.S. borrower with a Canadian operation, the loan is structured under one security agreement. In this case, that would have increased Connors’ tax liability. Instead, Bank of America Business Capital was the agent for all of the senior secured debt, but there were two sets of loan documents and two separate, distinct bank groups, enabling the combined company to borrow in either U.S. dollars or Canadian currency. ABL fits the bill With the Canadian income trust structure, an asset-based loan made a lot of sense. An income trust is akin to a REIT or an S corporation that distributes up to 100% of earnings to investors as dividends. An income trust needs the flexibility to maximize dividend distribution. An asset-based loan is more likely to offer it, since cash flow loans generally contain covenants that restrict a company’s ability to operate as financial performance fluctuates. Cash flow loans also often contain fixed charge coverage ratios and other restrictive covenants. So, even though the combined company’s earnings were robust enough to support a cash flow facility, Bumble Bee and Connors probably wouldn’t have been able to achieve the flexibility they were looking for to pay monthly dividends or fund seasonal working capital needs by using a cash flow lender. Asset-based lenders are focused on the value of the underlying collateral, so they generally are more comfortable with a company structured to distribute the vast majority of its earnings on a monthly basis. The covenant seen most often in asset-based loans is excess availability. As long as the borrower doesn’t draw down the revolver below a specified level, it’s free to focus on its growth and business objectives. In the case of Bumble Bee and Connors, as long as the value of the assets supports the underlying credit and the level of excess availability is maintained, the combined company may distribute all of its free cash flow while using its revolvers to fund working capital requirements and growth. Up next When Centre Partners acquired Bumble Bee, management’s goal was to find ways to expand the product line and increase market share. Within months it had established a growth trajectory and exceeded its financial targets. By combining with Connors, the company has added the world’s largest producer and marketer of canned sardines to its product portfolio. Further growth – both organic and through additional acquisitions – is expected. By any measure, the Bumble Bee and Connors combination, with its unusual legal and operating structure, was a complicated transaction. Although the company could have qualified for a cash flow loan by virtue of its strong EBITDA, the domestic and Canadian asset-based revolving credit facilities were the best fit under the circumstances. With its inherent flexibility, an asset-based loan enabled the combined company to distribute monthly dividends to shareholders while maximizing financial flexibility as a Canadian income trust. Bank of America Business Capital effectively structured U.S. and Canadian multi-currency, asset-based credit facilities with minimal covenants. Banc of America Securities arranged and syndicated the facilities. It’s an example of a strong company using an asset-based loan to meet its financial needs. Expect others to follow suit. n Jim Connolly is president of Bank of America Business Capital. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com

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