Schweitzer-Mauduit International’s debut bond deal offers a slight pickup to the high yield index and exposure to a diverse set of revenue streams designed to withstand an economic downturn, according to six sources following the transaction.

The deal is a bright spot in a market where high leverage and worsening covenant protections have many buysiders fretting about downside protection, sources said.

Schweitzer, which makes specialized paper products such as cigarette rolling papers and advanced materials for products such as water filters, is whispering USD 350m of senior unsecured notes due 2026 at 6.5%-6.75%. The JPMorgan-led roadshow runs through Friday with pricing expected thereafter.

Along with the BB-/B2 rated notes, the issuer is entering into a new USD 700m credit facility comprising a USD 200m TLA due 2025 and a USD 500m revolver which will be partially drawn at close, the sources added.

Proceeds of the transaction fund the repayment of the company’s existing TLA-1 due 2020 and refinance the existing TLA-2 due 2022 and existing revolver due 2020. Pro forma liquidity will be USD 478m with roughly USD 74m of cash on hand and USD 404m of availability under its new USD 500m revolver.

Pro forma leverage is 3.21x (compared to 3.16x previously) based on total debt of USD 656.8m and USD 204.9m adjusted LTM EBITDA as of 30 June, according to deal documents. During the lender call, company executives said they would consider taking leverage as high as 3.5x to make acquisitions, but otherwise the goal is to delever to 3x or less, one of the sources added.

Playing defense

With concerns festering the market about a looming turn in the credit cycle, Schweitzer’s deal offers a defensive option—a mix of businesses less susceptible to cyclicality, with digestible leverage and a reasonable covenant package, according to the sources.

The deal also offers a slight pickup in pricing to the broader market—the comparably rated portion of the ICE BAML High Yield Index was last quoted at 5.07% today.

Several prospective investors weighing the deal said they expect the company to generate USD 70m-USD 80m of free cash flow (11%-12% of total debt) based on flat USD 205m LTM EBITDA, USD 50m-USD 60m for dividends, USD 40m of capex and USD 35m of interest expense.

The company reported net sales growth through the 2008/2009 global financial crisis, according to SEC filings. Schweitzer has also invested over recent years to reduce its reliance on the tobacco sector, where sales are declining in developed markets. Some 49% of net sales came from the engineered papers business in 2017, down from 94% in 2012, according to SEC filings. Its advanced materials and structures business serves the infrastructure and construction, filtration, transportation, industrial and medical sectors.

“Their products aren’t cyclical,” said one buysider. “They might get hit by the trend towards e-cigs, Juuls and whatnot, but overall, their other products will help couch the blow.”

The company has also stayed on top of new developments in the tobacco space, sources pointed out. For example, it carries “heat-not-burn” tobacco products—marketed as more authentic than vaping but healthier than traditional cigarettes—and developed flame-retardant rolling paper, which is required in Europe to comply with safety regulations.

In what has been seen as a blow to the burgeoning e-cig industry, the Food and Drug Administration on Wednesday notified makers of e-cigarettes that they had just 60 days to prove they halt sales of their devices to minors, citing an “epidemic proportion” of vaping among teens.

“Theoretically that is positive for [Schweitzer] but they had already been diversifying away from their tobacco business anyway,” said another buysider.

Adding to the attraction of the company’s diversified business mix and modest leverage, the deal also contains a full suite of high yield covenants, according to a report from Xtract Research. That stands in contrast to many other deals in the market, such as online car retailer Carvana’s debut deal, which Xtract said had a “surprisingly weak” covenant package.

Patent expiration

As of 30 June, the company owned roughly 50 patents in its AMS segment and about 200 patents in its EP segment, according to deal documents. It has more than 50 pending patent applications in AMS and 100 in its EP segment.

The company cited patent expiration in the deal’s risk factors, but executives said they had been working to establish strong market share before this happens.

“They’ve been good with working with customers to give price concessions and build market share to protect their piece when the patent goes,” one of the buysiders said, referring to the flame-retardant papers product.

Because of the wide range of end-markets Schweitzer services, buysiders referenced similarly rated industrial companies including packaging company TriMas and manufacturer Actuant Corporation as comps. Two sources also mentioned Altra Industrial Motion, which is currently marketing a USD 1.34bn TLB.

Sources used TriMas and Actuant as comparison points for Schweitzer’s advanced materials and structures segment, though the companies target different industries.

“There isn’t a company that straddles the two things that [Schweitzer is] doing here,” said one of the sources. “They all reach industrial and infrastructure in some way, but TriMas has a place in the aerospace and energy sectors and Actuant reaches mining and energy, rather than tobacco like Schweitzer.”

TriMas is 1.8x levered, and its USD 300m 4.875% senior unsecured notes last traded at 96.25 to yield 5.517% on 23 August, according to MarketAxess. Actuant, which is 4x levered, has USD 300m 5.625% senior unsecured notes that last traded at 102.1 to yield 4.066% on 29 August.

Altra is marketing its TLB at L+275bps-300bps (0% floor) with a 99.5 OID. Its pro forma net leverage is roughly 4x, according to a source close to that transaction.

Schweitzer did not respond to a request for comment. JPMorgan declined to comment.

2018 Debtwire