Herbalife Nutrition’s proposed bond and loan refinancing package hinges on investor confidence that the nutritional supplement company’s expected performance stability will overcome the perceived stigma and risk of its oft-criticized multi-level marketing model, according to seven sources following the deal.

During marketing, company executives touted the feel-good factor of the company’s products and worked hard to portray Herbalife as a stable entity, sources said. Many buysiders are still put off by the criticisms that have dogged the firm in the past, but others said they saw beyond that perception.

“I know everybody thinks it’s a Ponzi scheme, but the numbers don’t lie, and the numbers are actually decent,” said a buysider. “You just need to digest the rest of the risk.”

Proceeds from the Jefferies-led deal are slated to refinance the company’s existing term loans and fund working capital and general corporate purposes. The package consists of an eight-year non-call three USD 400m senior unsecured bond, a five-year USD 200m TLA, a seven-year USD 600m TLB and a five-year USD 200m revolving credit facility.

Launched last week, the USD 600m first lien TL due 2025 is talked at L+ 375bps-400bps (0% floor) with a 99.5 OID. Unofficial price whispers for the bond are circulating in the 7.5%-7.75% area, according to three sources tracking the deal. Commitments for the loans are due tomorrow (9 August), with the bonds expected to price the same day.

The company’s shares trade at USD 59.20 for a market cap of USD 8.7bn, up 13% from before the refinancing was announced.

The pro forma capital structure includes USD 675m 2% convertible senior unsecured notes due 2019 and USD 550m 2.625% convertible senior unsecured notes due 2024, both structurally subordinated to the proposed notes and loans, according to company documents.

Along with the undrawn USD 200m revolver, the company will have USD 846m of cash on hand at deal close, according to deal documents.

Herbalife is levered a turn through its new term loans and 2.9x through the entire capital structure, based on USD 823m in LTM bank-adjusted EBITDA through 2Q18—which includes USD 134m of adjustments—and USD 2.4bn of total debt, according to deal documents. Sources preferred to strip away the adjustments, bringing total leverage to 3.5x, using LTM EBITDA of USD 689m through 2Q18.

Sources project free cash flow of roughly USD 489m (20.3% of total debt), based on USD 689m in LTM 30 June EBITDA, USD 91m in capex and USD 109m in interest expense. Two buysiders calculated USD 623m of free cash flow (26% of debt) using an LTM bank-adjusted EBITDA figure of USD 823m.

Pyramid? What pyramid?

Buysiders were mainly concerned with the borrower’s multi-level marketing (MLM) model, a company structure often thought to be related to pyramid and Ponzi schemes.

The suggestion that the company is a pyramid scheme was the driving force behind hedge fund manager Bill Ackman’s ultimately unsuccessful short crusade against the company, which he exited in February. On the long side, investors such as Carl Icahn have defended the company’s business model.

In marketing the deal, executives worked hard to portray Herbalife as a stable company that promotes a healthy lifestyle, said a buysider who attended last week’s bank meeting.

“With a pyramid you’re worried it will fall apart. They’re pushing stability,” one buysider said.

Buysiders said Herbalife’s business model would not be immune to an economic downturn. However, the company reported steady net sales through the 2008/2009 financial crisis. Customers’ dedication to the ‘Herbalife lifestyle’ should help maintain sales going forward, said another buysider.

“It’s really no longer about weight loss fads,” said another buysider. “It’s the maintenance of a different healthier lifestyle that made customers stickier.”

Still, the negative perception around MLMs and Herbalife in particular made several buysiders err on the side of caution.

“It’s the kind of thing where if it goes wrong, no one wants to have that conversation with their credit committee. In hindsight, people will say it was an obvious mistake,” one of the buysiders said.

In turn, sources agreed that most or all of the books will be filled in reverse inquiry from existing debtholders, including CLOs.

“You’d have to be ballsy to invest in these new deals. The existing lenders and holders, however, are already comfortable with the credit, have spent time going through all of the scenarios and can stomach the risk,” a buysider said.

Herbalife’s BB/Ba1 term loans should come tight of diet products MLM Isagenix’s recently issued USD 375m TLB due 2025, because Herbalife has a higher rating, is a bigger company and has a greater global footprint, sources said. Isagenix’s BB-/B2 rated loan, which saw investor pushback during syndication, priced at L+ 575bps (1% floor) with a 99 OID. It was last quoted in the 100.25/101 context, according to Markit.

They should also come tight of a recent loan deal from skincare product MLM, Rodan & Fields, which also saw investor-friendly changes including wider price talk. The BB/B1 rated TLB priced at L+ 400bps (0% floor) with a 99.75 OID, and was last quoted in the 100.625/101.063 context, according to Markit.

Currency exposure and litigation

Herbalife taps the international markets, which leaves it vulnerable to the volatility of foreign currencies, another buysider said. As of 31 December 2017, the company sold its products in 94 countries, according to deal documents.

“A lot of their earnings are US dollar-based. So the translation to US dollars is a factor, but also making sure the underlying risk is hedged. They have to make sure that there is enough receivable inventory on the balance sheet to be converted to cash,” the buysider said.

Meanwhile, the company has gone through litigation regarding its sales practices, but three sources said it appeared the company had turned a corner in that respect.

The Federal Trade Commission (FTC) fined Herbalife USD 200m after filing a complaint in 2016 that charged the company for encouraging participation in “a compensation structure that causes or is likely to cause harm to participants” and “making false or misleading income representations” among other things, according to FTC documents.

“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” former FTC Chairwoman Ramirez said after the settlement.

After purchasing products from the company at a wholesale price, participants now receive profits for the items they successfully resell to other parties, as well as if they recruit more participants to do the same, according to deal documents.

Herbalife still has to contend with a class action lawsuit in Florida. The plaintiffs allege that the company promised them a “guaranteed pathway to attaining life changing financial success,” according to court documents. The judge has set a 22 August hearing on Herbalife’s motion to compel arbitration and to change venue.

In general, sources said the company’s resolution of previous lawsuits, as well as Ackman’s exit from his short position, had given the company more credibility.

“The activist angle that played out is now in the past. Also, that sort of tested the model. If it can survive that there must be some legitimacy to the company. To a degree it has vetted them and they’ve come out better off for it,” one of the buysiders said.

Jefferies declined to comment. Herbalife did not respond to requests for comment.

2018 Debtwire