Wesco Aircraft has had to widen pricing expectations on the unsecured bonds backing its acquisition by Platinum Equity and subsequent merger with Pattonair, as potential lenders scrutinize the issuer’s highly adjusted financials, according to five sources following the deal.

Led by BofA, the company is offering USD 575m of Caa2/CCC+ senior unsecured notes due 2027 and USD 1bn of B3/B senior secured notes due 2026. In addition, Deutsche Bank is marketing a USD 600m TLB due 2026, talked at Libor+ 525bps with a 98 OID.

Commitments for the loan, which is rated B3/B, are due 31 October. The bonds are slated to price 1 November.

Whispers for the unsecured bonds were initially circulated in the high 10% area, but over the past couple of days have widened to the 11-11.5% range, according to two sources. The secured bonds, whispered at high 7%, are attracting more demand, the sources added.

For comparison, the average effective yield for single-B rated bonds is 5.77%, whereas the average yield for triple-C notes stands at 12.19%, according to the ICE BAML high yield index.

Proceeds of the debt raise will fund Platinum’s USD 1.9bn buyout of Wesco. Platinum, which is injecting USD 250m of fresh equity into the deal, will merge Wesco with portfolio company Pattonair and use additional proceeds to refinance debt at both entities.

Wesco is marketing the deal on 6.3x leverage at the consolidated company, based on about USD 355m of combined pro forma adjusted EBITDA and USD 2.24bn of total debt. Liquidity will be USD 421m through roughly USD 320m of ABL availability and USD 101m of cash.

Based on the company’s projections, pro forma free cash flow shakes out to roughly USD 140m (6.3% of total debt), based on USD 355m EBITDA, USD 28m of capital expenditures and USD 187m of interest expense.

Optimistic outlook

Wesco is projecting USD 57.4m of cost savings under Platinum’s stewardship, and an additional USD 135m of synergies with Pattonair—equating to more than half of pro forma combined EBITDA. Most of that is intended to come from cost cuts and operational improvements.

But several buysiders following the deal are only giving the company credit for USD 50m-USD 90m of the cost savings and synergies, modeling EBITDA closer to USD 210m-USD 250m. That would imply leverage of 8.9x-10.7x, far in excess of the company’s marketed numbers.

At those assumptions—which sources argued were more realistic given the execution risk of merging the two companies—the company’s cash flow profile is much more constrained. They imply USD 35m of potential free cash flow, dropping to a potential USD 15m cash burn. Moody’s also expects free cash flow of roughly USD 0m to negative USD 50m.

Wesco distributes and provides supply chain management services to the aerospace and defense industry. Pattonair provides parts required for an aircraft such as fasteners, clamps, bearings and seals.

After the merger, the consolidated company will draw 71% of its revenue from hardware and 29% from chemicals products, according to deal documents. Executives said the merger will enhance scale, and expand Wesco’s hardware offerings, said three buyside sources.

But Wesco faces the operational challenges of integrating Pattonair’s inventory forecasting methods and avoiding working capital pressures while executing the merger, the sources said. Given the company’s highly strung credit profile, it has little room for error, they added.

Sources were generally willing to give the company credit for some of the cost savings measures it is proposing at each entity. However, only one gave it credit for synergies between the two entities—to the tune of USD 40m.

“In order to achieve any synergies, the company has to execute this integration perfectly,” said one of the sources. “Their whole business depends on on-time customer deliveries and following through on a mix of long-term and direct contracts.”

Déja vu

Highly adjusted numbers and aggressive leverage have become a theme in recent Platinum buyouts, such as the LA-based sponsor’s recent acquisition of TruckPro and its LBO of Husky Injection Molding in 2018.

Husky, which was levered 7.3x at the time of its buyout, had a rocky ride after the deal although it has stabilized in recent months and reduced leveraged to 6.7x. Its bonds dropped to the mid-eighties last summer, when the company reported a 15% drop in EBITDA after the LBO.

Its USD 2.1bn L+ 300bps TLB due 2025 is currently quoted in the 94.773/95.455 context. Its USD 630m 7.75% senior unsecured notes last traded on 17 October at 93.75 for a 9.045% yield, up from trades as low as 81 in November 2018, according to MarketAxess.

Earlier this month, TruckPro issued the 11% secured notes backing its buyout by Platinum at a 12.66% all-in yield. Buysiders demanded wider pricing after expressing skepticism over the company’s highly adjusted financials.

TruckPro is levered 4.6x based on marketed numbers, but buysiders used more conservative numbers implying leverage of 6.4x. As well as widening pricing on the bonds, the issuer tightened covenants and made structural changes.

Dividend capability

Buysiders were also concerned with Platinum’s history of aggressively timed dividend recaps in recent years.

While Platinum may not be able to take out its entire investment of USD 250m, the bond documents do allow for the sponsor to issue a dividend to themselves as soon as the acquisition closes, according to a report by Debtwire affiliate Xtract Research.

Platinum waited just under two months after acquiring WS Packaging in February 2018 to partially recoup its investment, paying itself a USD 251m dividend with proceeds from a USD 250m secured bond issuance and cash on hand. WS now trades as LABL Inc after merging with Multi-Color earlier this year.

Last year, Platinum-sponsored Hunterstown Generation attempted to raise a USD 150m add-on term loan to pay a dividend. The distribution would have nearly recouped the sponsor’s USD 163m equity investment, made in April that year. Platinum eventually downsized the payout to USD 50m.

As of 30 June 2019, Hunterstown’s leverage exceeds 10x, according to Moody’s. The B1/BB- USD 450m L+ 425bps TLB due 2025 was last quoted today in the 92/94.5 context—in line with recent levels, but down several points from its 98/99 issue price, according to Markit.

Platinum-backed Vertiv tapped the market in February 2017 for an PIK toggle note to pay a dividend, just four months after its buyout. After reducing the dividend and making several document changes, Vertiv priced the deal at an all-in yield of 12.55%.

As of 30 June, Vertiv’s leverage shakes out to 6.6x, as reported. The Caa3/CCC+ USD 500m 12% PIK notes due 2022 last traded at 84.5 to yield 20.756%, down from trades at 88.5 at the beginning of October, according to MarketAxess.

BofA and Deutsche declined to comment. Platinum and Wesco did not respond to requests for comment.

2019 Debtwire