The buyout of TruckPro by Platinum Equity Advisors has drawn skepticism from prospective investors concerned over the company’s inflated pro forma adjusted EBITDA calculations, according to six sources following the deal. Also at the forefront of concerns is the earnings performance of past LBOs owned by Platinum, the sources said.

Proceeds from the proposed USD 300m secured bonds due 2026 are slated to fund Platinum’s buyout of the auto parts distributor from Harvest Partners. The notes are whispered in the 10% area, with lead bank BofA Merrill Lynch running the roadshow through Tuesday (8 October) with pricing expected thereafter, sources added.

Along with proceeds from the deal, Platinum plans to invest USD 139m of equity, sources noted. Rounding out the financing is a USD 75m ABL, which will be undrawn at close.

Out of the gate, the company is projecting pro forma leverage of 4.6x, based on LTM pro forma adjusted EBITDA of USD 65.7m as of 30 June and USD 300.5m of total debt, which also includes capital leases. After stripping out a USD 18.7m adjustment tied to operational improvements, adjusted EBITDA skates lower to USD 47m, sources added. Meanwhile, unadjusted EBITDA sinks to USD 32.5m on an LTM basis.

With USD 47m of adjusted EBITDA, leverage shakes out to 6.4x, nearly two turns more than the company’s pro forma projection, sourced added.

And leverage is expected to go higher. During yesterday’s investor call to launch the deal, management disclosed plans to continue growth through acquisitions, raising fears that the company will lever-up at a rapid pace amidst a potential market downturn, two of the sources said. Management on the call telegraphed its intention to expand through roughly four to five tuck-ins per year, they said.

“Platinum’s going to have to be careful with pricing these acquisitions and consolidating, because with margin compression, they don’t have much leeway,” one of the sources said.

Thus, investors are concerned that the company will not be able to grow into its capital structure, with organic EBITDA and revenue growth masked by acquisitions, three of the sources said.

Heading into a potential down-cycle, sources noted that the business is not as cyclical as a manufacturer of heavy trucks. Still, the company booked a 30% drop in EBITDA between 2008 and 2009, suggesting that the company is also not risk-agnostic in the event of another recession, the sources added.

On an LTM basis, the company’s revenue totaled USD 629.1m, compared to USD 615.85m in 2018 and USD 560.1m in 2017. The company’s revenue can be split into three segments: US retail (77% of LTM net sales), US wholesale (16% of net sales) and Canada (7% of net sales), two of the sources noted.

Sources estimate pro forma free cash flow of roughly USD 12m (4% of total debt), assuming USD 47m of adjusted EBITDA, USD 5m of capex and USD 30m of interest expense based on price whispers.

Pro forma the deal, the company has roughly USD 68m of liquidity through a zero cash balance and USD 75m of ABL availability, netting USD 6.8m letters of credit.

Still, some investors express reluctance in playing a Platinum deal, citing the disappointing post-LBO earnings of Platinum portfolio companies Husky Injection Molding and Yak Access. While trading levels in these credits have improved recently, both have experienced substantial volatility since their buyouts last year, which were also led by BofA.

Earlier in the year, quotes on the Yak Access USD 680m Libor+ 500bps TLB due 2025 backing its June 2018 LBO languished to the 82.75/84.25 context following poor results in 3Q18 and FY18.

The debt has slowly recovered to the 91.333/92.833 area currently, after the borrower posted better earnings and sought to proactively reassure creditors about its outlook, as reported.

Yak Access’s USD 180m L+1,000bps second lien due 2026 is quoted in the 86.167/88 area, versus 78/81.5 on 1 February, according to Markit.

Meanwhile Husky’s USD 2.1bn L+ 300bps TLB due 2025 bank debt is currently quoted in the 95.594/96.281 context, from a low of 91.208/92.792 at the start of 2019, according to Markit.

Husky’s USD 630m 7.75% senior unsecured notes last traded today at 93.5 for a 9.091% yield, up from trades as low as 81 in November 2018, according to MarketAxess.

From a credit perspective, sources cited B3/B- rated competitor Fleetpride and B3/B- rated truck bed distributor Truck Hero as comps.

Fleetpride has a USD 620m L+ 450bps TLB due 2026 and a USD 225m L+ 800bps second lien TL due 2026. The TLB was last quoted yesterday in the 97.9/99 context, while the second lien is quoted today at 96.917/100, according to Markit.

Fleetpride’s blended yield to three-year call is 7.52% compared to TruckPro’s 10% whispers.

Truck Hero’s USD 335m 8.5% senior unsecured notes due 2024 last traded at 99.25 to yield 8.7%, in line with recent levels, according to MarketAxess.

Harvest and Platinum did not respond to requests for comment. Bank of America declined to comment.

2019 Debtwire