Hanover Loan to Help Retire Junk Debt of Color Tile Inc.

Color Tile Inc. plans to retire high-cost junk bonds with lower-cost bank loans underwritten entirely by Manufacturers Hanover Trust Co., a Hanover official said Monday.

The blended rate on three tranches of existing junk debt, totaling $260 million, is about 13%. The new bank loans are priced at 2.75% over the London interbank offered rate, currently about 5%.

Seven-Year Loans

The $250 million package provided by Hanover consists of a $150 million term loan and a $100 million revolver, both due in seven years.

Color Tile's interest coverage ratio will improve markedly, but the company will continue to be classified for regulatory purposes as a so-called highly leveraged transaction.

Hanover is one of a dwindling number of banks still willing to underwrite big HLT loans.

Officials at Color Tile in Fort Worth, Tex., did not return phone calls by press time about the new bank financing.

A Hanover official said part of the bank credit is earmarked for working capital. He declined to say exactly how much would be available to retire the junk bonds.

However, Color Tile also plans to issue $50 million in new subordinated debt. Among other options, the new subordinated debt could be exchanged for some of the company's existing junk bonds.

Hanover is backstopping the new subordinated debt with a $50 million bridge loan.

At the same time, Color Tile is getting $80 million of fresh equity from its owner, Investcorp. It wasn't immediately clear what form the new equity investment would take.

Investcorp acquired Color Tile, a nationwide operator of retail floor covering outlets, in late 1989 from Knoll International Holdings for $450 million. Knoll had acquired the company three years earlier in a leveraged buyout.

Investcorp's initial equity investment was $50 million, but with the additional equity infusion, that figure will rise to $130 million.

Hanover plans to invite about 27 banks to participate in a syndicate for the new loan package. A bank meeting is tentatively scheduled for next Monday, Dec. 9, according to Dominick Baione, head of Hanover's acquisition finance department.

He said Hanover will mainly invite banks that participated in the financing for Investcorp.'s acquisition last year of Saks Fifth Avenue for $1.5 billion.

Hanover was lead bank on the Saks deal. As lead bank for the new Color Tile credit, Hanover will will receive an annual agent fee of $250,000.

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