Howden spinoff financing gets lackluster response as market weighs cyclicality and leverage risks

[This story has been edited since publication to clarify that the spinoff financing is being issued under Granite US Holdings. Changes have been made to the third paragraph.]

Howden is struggling to entice investors to its spinoff financing at current price talk, as the issuer’s elevated pro forma leverage and exposure to highly cyclical end-markets are proving a tough sell, according to six sources familiar with the situation.

Pricing on the loan portion of the financing is expected to shake out wider than current talk of Libor+ 425bps-450bps for the loan, which could push the bond wider than current whispers of 10% area, the sources said.

The financing, issued under Granite US Holdings, an entity created by KPS for the spinoff, includes a USD 925m TLB due 2026, for which commitments are due today, and USD 300m senior unsecured notes due 2027, slated to price tomorrow (20 September). Both offerings are being led by JPMorgan.

Proceeds are intended to support KPS Capital’s roughly USD 1.8bn acquisition of Howden from Colfax. The business was courted by several private equity bidders that included KPS, Rhone and Platinum, among others, as reported by Debtwire.

The company’s pro forma leverage totals 5.76x, based on pro forma adjusted EBITDA of USD 212.7m and USD 1.225bn of total debt. Using LTM adjusted EBITDA of USD 204m, leverage ticks up to 6x.

Pro forma liquidity shakes out to USD 163.5m through USD 13.5m of cash and USD 150m of revolver availability.

The company designs, engineers and manufactures air and gas handling equipment, such as compressors, fans, heat exchangers and stream turbines.

Howden derives its revenue from four end markets: industrial (46% of 2018 net sales), power (29% of 2018 sales), oil & gas (17% of 2018 sales) and mining (8% of 2018 sales), according to company documents. Some investor concerns stem from the cyclicality of the sectors from which the company’s revenue is dependent. More specifically, investors pointed to Howden’s exposure to the declining coal industry and volatile commodity prices, sources said.

Oil prices have been through their own rollercoaster this last week, following macro news of drone strikesa pushed-up timeline and additional taxes. WTI went as high as USD 62.90 per barrel on Monday before dipping down to USD 58.04 and settling today at 58.39 per barrel.

Coal prices, on the other hand, fell off a cliff in August and have steadily declined since. Coal was last quoted at USD 45.05 per short ton, down from USD 53.55 on 12 August.

While operational restructuring maneuvers from recent years have helped the company reduce its manufacturing footprint, some investors are weary of Howden’s prospects as a standalone entity, two of the sources said.

The bonds are whispered much wider than Colfax’s recently placed dual tranche USD 1bn notes. The USD 600m 6% senior unsecured bonds due 2024 last traded today at 106.4 to yield 3.379%, according to MarketAxess.

Compared to the high yield index for similarly rated bonds, whispers for the Caa1/B rated bond are in between the average yield for CCC-rated credits at 11.72% and for B-rated credits at 5.82%, according to the ICE BAML Index.

Colfax did not respond to a request for comment. JPM declined to comment.

2019 Debtwire

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