JW Aluminum’s second stab at secured bond syndication gets lackluster response

JW Aluminum is struggling to get investors interested in its new USD 285m secured notes offering at the single-digit pricing that it’s been angling for since it withdrew a similar deal back in February, said seven buysiders and a trader following the deal. The company needs the proceeds for a crucial revitalization project that’s already underway.

As such, the flat-rolled aluminum products producer now finds itself somewhat at the mercy of buyside pricing demands, since the optics of pulling another deal from syndication and having to return a third time to raise the funds could be especially problematic. At the heart of some investor qualms about the bonds is JW’s dependence on commodity prices – which led it into a debt restructuring less than three years ago, sources said.

“They’re dependent on Midwest Aluminum Premium, which can collapse – and the best example of this is their last restructuring,” one of the buysiders said. The price of aluminum on the London Metal Exchange bottomed out in November of 2015 at USD 1,425.5 per metric ton, compared to USD 2,082 a year earlier. It has since recovered to trade at USD 2,303 per metric ton yesterday (17 May).

Still, this time around JW has an improved credit profile versus when it came to market during 1Q, thanks to EBITDA improvement and an increased capital contribution from its sponsors.

The company’s principal shareholders now include Goldman Sachs, FS/KKR Advisor, Pentwater, and Magnetar, after its November 2015 restructuring deal cut USD 135m in debt from its balance sheet, according to a source familiar with the company

Goldman Sachs also serves as lead bookrunner, and launched the B-/B3 rated eight-year USD 285m senior secured notes on Tuesday (15 May) with plans to wrap the roadshow yesterday (17 May). Price whispers have been a moving target in recent days, circulating in the high 9% to 10% area, sources said.

However, many buyside accounts expressed interest initially if the yield would have come in the double-digits, said five sources.

“Goldman said they recognize they tried to bring this deal before for an eight-handle and it didn’t work,” a buysider said, adding that this time around the company “might have to swallow a coupon of 10% or higher.”

Marketing of the bonds will extend into next week, as Goldman hasn’t yet set official talk.

Proceeds from proposed bonds are to fund Project Boilermaker, a modernization project for its largest plant in Mount Holly, South Carolina, and to pay down a USD 151m term loan due 2023. A sponsor contribution of USD 50m, up from USD 35m planned when it first unveiled the bond deal in January, completes the pro forma funding needs. This contribution is in addition to a USD 35m capital contribution from the sponsors in late February.

“It makes sense that the bondholders would want the sponsors to inject more equity into the deal since that would make them junior to the bondholders. But the more important thing is aluminum. The price of aluminum has been all over the place, and investors obviously don’t want to buy into a deal that’s not going do well,” said a buysider.

JW originally brought a slightly larger USD 300m deal to market in January, and pulled it on 6 February amid a sharp selloff in equities, citing adverse market conditions, a source said. By that time, price whispers had climbed to the 10% area.

“Yes, the market fell, but only after they roadshowed for a week,” a buysider said. “They just didn’t want to pay that high of a coupon.”

Pro forma leverage is around 5.8x, based on USD 47.2m in LTM adjusted EBITDA at 31 March and USD 275m total debt, according to a source familiar with the matter, up from 4x before the deal based on USD 189m of total debt. In comparison, when JW announced the deal in January, pro forma leverage would have been 7.4x, based on USD 288.611m of total debt and USD 39.096m LTM adjusted EBITDA.

The Project Boilermaker plan will increase annual production capacity to 408m pounds, up from 230m pounds, according to a source familiar with the matter, by updating the plant’s equipment. Construction began in February 2018, with full production and sales operations projected to begin by February 2022.

The total estimated cost of the project rose to USD 269.5m from USD 255m, when the initial deal was announced in January. The increase is due to a jump in the estimated cost of Phase I to USD 198.5m from USD 185m.

“I would argue they’re doing a better project,” said a buysider. “Everyone else is just rolling, existing, trying to get a better rate, but they’re doing material improvements.”

The deal would offer a significant premium over the bonds of fellow high yield rolled aluminum makers Aleris and Novelis. Aleris’s CCC+/Caa2 rated USD 440m 7.875% senior unsecured bond due 2020 last traded yesterday (17 May) at 98.5 to yield 8.564%, while Novelis’s B2/B USD 1.5bn 5.875% senior unsecured notes due 2026 last traded today at 99.375 to yield 5.972%, according to MarketAxess.

“JW Aluminum is definitely going to price wider than Novelis. Novelis is much bigger and most of their revenue comes from beverage cans, which as an industry does not face much volatility, whereas JW’s business includes more industrial end market and packaging products,” said one buysider. “Aleris, like JW, includes some industrial end market products, but they’re more diversified than JW.”

Moody’s estimates that JW will burn cash through 2020, and that it could return to positive free cash flow in 2021. Pro forma the deal, the company will have USD 134m cash and an undrawn USD 90m revolver.

Goldman Sachs and JW Aluminum declined to comment.

2018 Debtwire

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