Platinum Equity returned to market this week seeking to capitalize on investor appetite for yieldy dividend deals. Its portfolio company, Husky Injection Molding, is marketing a USD 450m note, which if placed, would make it the first holdco PIK toggle dividend deal in the US since Pharmaceutical Product Development in May 2019.

The syndication comes on the heels of Platinum’s dividend bond deal issued by Cision, which was announced the same day that Cision’s LBO financing allocated. The USD 300m 9.5% senior notes due 2028 supporting the dividend priced at par last Friday (31 January), and last traded today at 101, according to MarketAxess.

However, the Husky deal, whispered at 12% with an extra 75bps when paid in kind, has run into delays as investors size up the detrimental cash flow effect and loose documentation, said three sources. Also on investors’ minds is the company’s own poor performance immediately following the 2018 LBO, said the sources and three additional sources.

Lead bookrunner BofA held an investor call on Tuesday (4 February) to pitch the new holdco notes to investors, and initially planned to wrap the deal today. Now, investors are expecting covenant changes, including potentially re-vamping the prepayment provisions, the sources said.

Platinum acquired Husky in March 2018 for USD 3.85bn, including a roughly USD 1.2bn equity contribution. The USD 450m in bonds would return nearly 40% of the initial investment.

The LBO was backed by a USD 2.1bn Libor+ 300bps TLB due 2025, which has traded off by about two points since the dividend deal was announced, to 96.313/97.188, according to Markit. Its USD 630m 7.75% senior unsecured notes due 2026, also issued at the time, traded down to 95 to yield 8.81% yesterday from trades at 97/98 late last week. The notes recovered to trade at 97.5 to yield 8.271% today, according to MarketAxess.

The holdco notes will kick Husky’s leverage up by more than a turn, to 8x from 6.8x currently, based on USD 396m of LTM 30 September adjusted EBITDA (excluding USD 26m of cost savings initiatives) and USD 3.15bn of total debt. It also cuts free cash flow to USD 134m (4.2% of debt), from USD 188m (6.9% of debt), if the company cash-pays the USD 54m of interest on 12% bonds.

Moreover, if the company runs into earnings problems again – as it did in 2018 – leverage could climb to worrisome levels. At its 2018 adjusted EBITDA of USD 344m, pro forma the new bond, leverage would amount to 9.1x.

Throughout 2018 the issuer’s opco notes sunk to trading levels in the 80s, as reported.

“With the new USD 54m dividend from opco to holdco, their margin of error for free cash flow is paper thin,” one of the sources said.

Among the structural changes that some investors would like to see is a longer non-call period (currently one year) and a more lucrative equity claw. Currently the equity clawback for up to 40% of the notes allows the company to buy the bonds at 102 in 2021, 101 in 2022, and par the following year.

Meanwhile, according to Xtract Research, the documentation contains an “unreasonable” USD 200m basket for priming holdco debt in the future guarantor covenant. The covenants also include permitted liens exceptions, which could be used for the incurrence of secured debt at the issuer level.

A Platinum deal

Husky’s earnings have rebounded since the 2018 volatility, and management claims to have rightsized the additional costs by reducing overhead costs, direct materials spend, non-production materials spend and increasing manufacturing efficiency – leading to a projected USD 30m of cost savings in 2019 and USD 38m in 2018.

Investors also pointed out that even excluding cost savings, the company’s EBITDA margin was 30.2% on an LTM basis, up from 27.3% in 2018 and 27.6% in 2017.

On a macro level, some investors view Husky as likely to perform well in a recession based on its flat year-over-year EBITDA performance during the 2008/2009 financial downturn.

However, others are more bearish in the case of a recession, given the increasingly negative perception of single-use plastics. The company’s regional investments have been paused due to global regulations banning single use plastics in some countries and other countries requiring PET bottles to incorporate recycled materials post-2025, according to deal documents.

And many investors are more focused on evaluating Platinum’s game plan.

“This deal is more to me a testament to the sponsor than the company,” one of the sources said. “There are sponsors that want all this stuff in their docs and in the end they don’t use them. Then there’s Platinum, which wants this stuff to actually use it.”

Platinum’s history of quickly timed dividends includes WS Packaging, for which it waited two months in 2018 before taking a chunk of its investment back.

Platinum-backed Vertiv also tapped the market in February 2017 for a 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%.

Looking ahead, Platinum has guided to holding on to Husky for the next two to three years and then taking the company public, two of the sources said. The company refers to the deal as in “mid-flight”, according to deal documents.

Messages left for BofA, Platinum and Husky were not returned.

2020 Debtwire