Baldor Electric buys relief on debt covenants (updated)

For a fee of $6.83 million, Fort Smith-based Baldor Electric Co. announced Wednesday (April 1) it was able to amend a credit agreement so as to avoid future problems related to meeting their debt covenants.

Specifically, a debt ratio of 3.75 to be met by Dec. 31, 2009 has been relaxed to 5.25. Essentially what was amended was $911 million — a $711 million outstanding balance along with a $200 million revolving loan. Handling the matter for Baldor was global finance giant BNP Paribas.

Baldor, a company that historically carried little debt, placed a lot of debt on its books with the $1.8 billion acquisition of competitor Reliance/Dodge in November 2006.

Kristine Kubacki, a senior analyst with Nashville-based Avondale Partners, noted that Baldor’s total debt as of Jan. 3 was $1.32 billion.

While some see that as no small sum for Baldor, Kubacki said in a Feb. 18 report that she is not overly concerned about the company’s ability to manage the debt and its associated covenants.

“(Baldor) plans to reduce debt by a minimum of $125 million during 2009. The current debt to EBITDA (earnings before interest, taxes, debt and amortization) ratio for Baldor is 3.81 and this ratio needs to be reduced to 3.75 by Dec. 31 2009. Management stated that with the planned debt reduction, cost reduction plans and current sales initiatives that they don’t see 3.75 being difficult to achieve,” Kubacki wrote.

Baldor’s Wednesday announcement validates Kubacki’s optimistic report.

“We have been in compliance with all of our financial covenants since the credit agreement was initiated on January 31, 2007, and since that time we have reduced our debt by $225 million,” Baldor Chairman and CEO John McFarland noted in a statement. “However, given the uncertain economic conditions, we believe the right thing to do is to proactively amend our agreement today.”

He continued: “Obtaining sufficient cushion under our covenants gives us flexibility to manage our business and take care of our customers for the long-term.”

Baldor markets, designs, and manufactures industrial electric motors, mechanical power transmission products, drives, and generators.