KKR's Masonite Negotiates Terms Of Its Bankruptcy

Canadian door manufacturer Masonite, which in 2005 was acquired by KKR for $2.5 billion, has prenegotiated the terms of its upcoming bankruptcy with its lenders. The company which breached covenants as long ago as middle of 2008 has long been expected to file for chapter 11. Under the terms of the prepack, secured lenders holding a $1.175 billion term loan and a $350 million revolver will receive either a pro-rata share of a new $200 million term loan or a new 2nd lien $100 million PIK loan and 97.5% of the equity in the reorganized company. Holders of the company's $770 million 11% notes due 2015 will receive 2.5% of the equity as well as some even more worthless warrants. The plan would be consummated via a brief bankruptcy filing with all conversion previously agreed upon, and as both the secured lenders and the ad-hoc noteholder committee have voiced their agreement there should be no hiccups.

As a result of the bankruptcy, the company's $2.2 billion in debt would be reduced to $300 million and interest expense would be cut by $145 million. . Masonite's words of comfort will likely not provide relief to P/E backer KKR:

"We are very pleased to have reached an agreement in principle on a plan that will allow us to reduce our debt substantially and put Masonite in a stronger, financially healthier position for the future," said Fred Lynch, President and Chief Executive Officer of Masonite. "With an appropriately sized capital structure and greater financial flexibility, along with our excellent market position, strong brand, and industry-leading products, we believe we will be well-positioned to take advantage of market opportunities and grow our business over the long term."

This is because the only sure loser in the deal would be KKR itself, which will not only lose the equity, but may be impaired at the bond level: the 11% notes were converted from a KKR-backed bridge loan which was part of the LBO, and and subsequent plans to raise high yield debt were scrapped.