Debt Junkies: Realogy Pays Off Debt With Yet More Debt

Heidi Moore:

Today is a day many have dreaded. It’s the first day that a company has actually used a much-maligned financing structure that allows them to pay debt with debt.

The company is Realogy, which runs real estate franchises. Interest was coming due on its bonds. So Realogy, which doesn’t have a lot of cash to throw around right now, decided to take advantage of a payment-in-kind toggle to pay down the interest with more debt, according to Dow Jones Newswires.

So what’s the problem? Wouldn’t anyone like the chance to push off a heavy payment a little longer?

That’s precisely the problem. Once upon a time — even as recently as 2006 — a company like Realogy would have tripped its covenants with its lenders. In turn, the lenders would pull the company back to the negotiating table to talk about new terms, and a signal would go up to start examining why the company couldn’t pay its interest bills.

Realogy SEC filings, including words regarding leverage:
We are significantly leveraged. As of December 31, 2007, our total long-term debt (including current portion) was approximately $6,239 million (which does not include $525 million of letters of credit issued under our synthetic letter of credit facility and $37 million of outstanding letters of credit). In addition, as of December 31, 2007, our current liabilities included $1,014 million of securitization obligations which were collateralized by $1,300 million of securitization assets that are not available to pay our general obligations. Moreover, under the senior toggle notes, we have the option to elect to pay interest in the form of PIK interest through October 15, 2011. In addition, a substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain short-term prevailing interest rates. In the event we make a PIK interest election or short-term prevailing interest rates increase, our debt will increase.
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This page contains a single entry by Jim Zellmer published on March 27, 2008 8:24 AM.

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