Korn Ferry Update

Anthony Palazzo

When we last checked on Korn Ferry International (NYSE: KFY), the Century City-based executive recruitment firm was in breach of a financial covenant on its $100 million bank line with Bank of America, and attempting to renegotiate the agreement. According to a recent Securities and Exchange Commission filing, Korn Ferry has breached another covenant (the leverage ratio, a measure of debt load), in addition to the previously reported fixed charge coverage ratio (a measure of cash flow).

What's more, Korn Ferry's bankers now say they have "no further obligation or commitment to make loans" under the agreement, and based on discussions to date, the company believes "no additional borrowings will be available" on the line through its expiration in November.

The filing shows that Korn Ferry is still in peril, despite staff cutbacks and organizational realignment by Chairman and Chief Executive Paul Reilly, who joined the firm in mid-2001. While discussions on the credit line are continuing, BofA has the right to simply call the loan in and demand immediate repayment of the $48 million outstanding.

If this were to happen, Korn Ferry would need to find alternative sources of financing a tall order for a company whose revenue fell by 37 percent in its most recently reported period. (Company officials did not return calls.)

Korn Ferry had $56 million on hand at Oct. 31 (though much of this is tied up in Europe, and can't be repatriated due to steep penalties). Assuming its bankers hold off on a payment demand, Korn Ferry said in the filing that it has sufficient liquidity to fund its current expenses.

Even so, it faces challenges. It will need to refinance or replace the facility by November, and it also must separately refinance acquisition-related notes totaling $11.8 million, which mature in December 2002 and April 2003. Korn-Ferry also faces cash payments in July of up to $60 million in employee bonuses.

Anthony Palazzo

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