RAC in £290m recap deal

The Carlyle Group has taken a £290m dividend out of UK roadside assistance group RAC, mirroring the strategy employed by the private equity backers of rival breakdown services company the AA.

   The RAC, which was acquired by Carlyle last June for £1bn, has added a £260m term loan to its debt structure that, along with £30m from the company’s balance sheet, will be used to repay shareholder loans, according to a rating filing from Standard and Poor’s, which affirmed “highly leveraged” RAC’s B+ rating with a “stable outlook”.

   The rating agency said that the remaining shareholder loans would continue to accrue payment-in-kind interest at a rate of 12% per year.

  The firm opted for a “best efforts” bookbuilding process rather than an underwritten refinancing package, said people familiar with the matter. The move avoids using costly underwriters for the process.

The Carlyle Group did not respond to requests for comment.

  CVC Capital Partners and Permira, the private equity backers of the RAC's main rival, the AA, caused controversy in 2004 when they paid themselves a dividend at around the same time that more than a third of the AA’s 11,400 workforce was cut.

  Then, in 2007, when the AA was merged with Charterhouse Capital Partners-backed over 50s travel and insurance group Saga -- forming what is now known as Acromas -- the sponsors took a further £2bn dividend and loaded £4.8bn of debt onto the company.

  In the case of the RAC, Standard & Poor’s said that it had lowered the recovery rating on RAC’s existing £620m debt to 4 from 3 reflecting that lenders could expect to recover between 30% and 50% of their investment in the event of a payment default. The same rating was given to the new £260m debt facility.

  The rating agency said: “The downward revision of the recovery rating on the existing facilities reflects our view that the addition of £260m term loan C has reduced the recovery prospects for the various senior secured debtholders.”

  RAC’s adjusted earnings before interest, taxes, depreciation and amortisation are expected to reach £125m, while revenue is expected to grow by 5% to £460m by December 31, 2012, the rating agency said.

  RAC was forced to remove a provision to issue a high-yield bond from the term sheet for the £620m loan package financing their buyout of the company last year, following concerns from potential lenders that the bond would bring the company’s leverage or ratio of net debt to Ebitda to seven times from about 5.3 times at the time.