Altegrity leveraged loans dip, high yield bonds in price discovery as DOJ alleges fraud

altegrityDebt backing Altegrity is quoted lower in wide markets today after the U.S. Justice Department yesterday accused the firm’s USIS division of defrauding the government of millions of dollars by filing at least 665,000 incomplete background investigations.

Bonds backing the firm were down roughly five points, though under price discovery, in the secondary market this morning on the news. The 10.5% senior notes due 2015 were variably pegged in the mid-80s to 90, with five-point bid/ask spreads, while the 11.75% subordinated notes due 2016 fell to either side of 70, also with wide quotes, versus 74/76 before the news, according to sources.

In the loan market, one dealer is marking the TLB due 2015 (L+400, 1% LIBOR floor) at a 96/97 market and the TLD due 2015 (L+600, 1.75% floor) at 98/99, versus levels at 98/98.5 and 99.625/100.125, prior to the news, sources said.

The Justice Department yesterday filed a complaint joining a whistleblower lawsuit against USIS filed in the U.S. District Court in Alabama. In its complaint, the Justice Department says that beginning in at least March 2008 and continuing through at least through September 2012, the firm’s management “devised and executed a scheme to deliberately circumvent contractually required quality reviews of completed background investigations in order to increase the company’s revenues and profits.”

“Specifically, USIS devised a practice referred to internally as ‘dumping’ or ‘flushing,’ which involved releasing cases to OPM and representing them as complete when, in fact, not all ROIs comprising those cases had received a quality review as required by the Fieldwork Contracts,” the complaint continues, noting that the investigations that were “dumped” spanned most federal agencies.

As a result its “fraudulent conduct,” the Justice Department said USIS received millions of dollars it would not have otherwise received had the U.S. Office of Personnel Management been aware that the background checks had not gone through the required quality-review process. Also, OPM also would not have awarded the firm performance awards for the years 2008-2010 totaling about $11.75 million, the complaint said. (The full complaint is attached).

USIS conducted the background checks for NSA leaker Edward Snowden and Aaron Alexis, the gunman at the Navy Yard shootings in Washington, D.C. last year, according to media reports.

Separately, media reports last week said that Altegrity is working with restructuring bankers at Evercore Partners to help it address its upcoming debt maturities.

As of April 2013, the company had just over $1 billion of term debt maturing in February 2015, according to a Moody’s report at the time. The TLB was placed in October 2007 to help support Providence Equity’s acquisition of USIS from Welsh Carson Anderson & Stowe and Carlyle Group, while the TLD was issued in 2010 to support the company’s purchase of Kroll from Marsh & MacLennan.

The company’s bond debt includes $290 million of 10.5% notes due 2015, rated CCC-/Caa3, and $150 million of 11.75% subordinated notes due 2016, rated CCC-/Ca. Issuance was under Rule 144A for life in late 2007 backing a sponsor-to-sponsor sale of the firm.

Altegrity is rated CCC+/Caa2, while the loans are rated B-/B3, with a 2 recovery rating from S&P.

Falls Church, Va.-based Altegrity provides information, security, training, investigations, analytics, financial-advisory, and technology services to governmental and commercial clients. – Kerry Kantin/Matt Fuller

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