Atotech ends drought for PIK toggle dividend deals, entices yield-starved investors

Atotech’s new USD 300m 8.75%/9% notes mark the first holdco PIK toggle dividend deal issued this year in the US high yield market, according to Debtwire data.

The chemical company’s sponsor, The Carlyle Group, is recouping nearly half of its original equity contribution with proceeds from the bonds and a USD 200m add-on term loan – but sources note the January 2017 LBO was arguably over-equitized to begin with.

“Carlyle put in 40% equity, at a time when most PE funds were putting in 25%-30%,” said a buysider. “They’re probably one of the better sponsors; at least they have a better track record in this space. Obviously a dividend deal is never the best, but I don’t think it’s egregious here.”

Before Atotech’s CCC+/Caa1 deal, which priced yesterday, the last PIK toggle dividend deal to clear the market was Polaris Intermediate Corp (aka MultiPlan) in November 2017. That deal, a B-/Caa2 USD 1.3bn 8.5%/9.25% note due 2022, last traded 23 May at 103.75 to yield 7.096%.

Only two other holdco dividend deals priced in all of 2017 – Eagle Holdings’ USD 550m 7.625%/8.375% senior PIK toggle notes due 2022 in May and Vertiv’s USD 500m 12%/13% senior PIK toggle notes due 2022 in February, Debtwire data show. The Eagle Holdings notes traded yesterday at 101.25 to yield 6.93%, but Vertiv’s bonds haven’t held up as well, last trading Tuesday (22 May) at 95.75 to yield 13.471%.

Platinum Equity-owned Vertiv is somewhat emblematic of the risk of buying into holdco notes, as the notes bore the brunt of selling pressure after it just last week reported a year-over-year EBITDA decline for 1Q18, said one of the sources. The data center equipment provider’s 12% toggle notes fell as low as 92.5 to yield 14.662% last week, from trades around par previously, according to MarketAxess. Meanwhile, its opco USD 750m 9.25% unsecured notes due 2024 last traded at 98.25 yielding 9.62% compared to par earlier this month and a 94.5 low on 17 May, and quotes on its USD 2bn Libor+ 400bps TLB due 2023 have sagged by less than a point to the 98.8/99.45 context, according to Markit.

In Europe, PIK toggle dividend deals have been similarly rare over the last year. Kleopatra Holdings 1 (aka Klockner Pentaplast) came in July 2017 with EUR 395m 8.5%/9.25% senior PIK toggle notes due 2023 and Horizon Parent Holdings priced EUR 350m 8.25%/9% senior secured PIK toggle notes due 2022 in May 2017. Meanwhile, a PIK for life deal from Ardagh for USD 350m notes due 2023 was issued out of newly formed subsidiary ARD Securities Finance in January 2018.

For Atotech, lead bookrunner JPMorgan launched the five-year bonds on Monday (21 May), and priced them yesterday in line with talk, at a 99.01 OID to yield 9%.

Back where it started

Investors piled into the deal, nudged along by promise of yieldy paper. The 9% all-in pricing offers a 250bps premium over Atotech’s existing USD 425m 6.25% senior unsecured notes due 2025 that sit at the opco, for less than a turn of additional leverage.

The opco notes last traded in size at 101.7 yielding 5.73% on 10 May, according to MarketAxess. More recently, after the dividend deal was announced, the bonds were quoted around 99 for a 6.434% yield, said a trader.

The new PIK toggles traded this morning at 100.625 yielding 8.51%. In comparison, the average yield of all high yield deals at issuance so far during 2Q18 is 6.99%. The average for all chemical deals over the same period is 7.29%, according to Debtwire data.

“Nothing in chemicals is that high,” said one buysider, referencing the relative attractiveness of the economics of taking on the holdco risk.

The Atotech holdco paper offers a buying opportunity for some who like the credit but passed on the opco notes last year. “Pricing was too tight [on the opco notes] so I ended up passing,” one of the sources said.

Indeed, other recently issued deals with high single-digit or low double-digit yields were largely for more problematic credits, like Titlemax’s USD 450m senior notes due 2023, which priced at 11.125% and par, and JW Aluminum’s USD 285m senior secured notes due 2026, which priced at 10.25% and par. Consumer finance provider Titlemax faces perennial regulatory pressures while JW is closely tied to commodity prices that brought on a restructuring just a few years ago.

So far Atotech has a successful LBO story to tell. Carlyle bought the company from Total SA for USD 2.7bn, contributing USD 1.2bn in equity, or 44% of the deal’s enterprise value. The LBO was backed by the 6.25% bonds as well as a USD 1.4bn in term loans, with leverage at the time around 6.8x given USD 274m in 2016 adjusted EBITDA.

Now, leverage has declined to the 5x area thanks to an increase in adjusted EBITDA to USD 355m. The USD 500m in additional debt to back the dividend will bring total debt to USD 2.4bn and send leverage back up to 6.8x – or right around its initial LBO level, sources said. Looking ahead, Carlyle still has around USD 700m of skin in the game, sources noted.

Both Standard & Poor’s and Moody’s note that Atotech has a leading position in electronics plating and should generate free cash flow in the year ahead. Moody’s projects EBITDA growth in the near term and estimates the company will throw off USD 90m-USD 95m in free cash flow annually over the next two years.

Pro forma the deal, liquidity is USD 561m, including USD 250m of availability out of a USD 277.5m revolver and USD 311m of cash.

Carlyle and JP Morgan declined to comment. Atotech and Vertiv did not respond to requests for comment.

2018 Debtwire

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