Vector Group’s secured refinancing deal is drawing strong investor interest, as buysiders cheer the tobacco and real estate company’s less aggressive dividend policy and a bump in earnings due to the COVID-19 pandemic, according to six sources following the company.
With smokers opting for cheaper cigarette brands during the pandemic—and many increasing their intake—Vector’s deeply discounted cigarette business is booming, the sources said. The division’s market share rose to 4.3% in the nine months ended 30 September, up from 4% in 2019 and 2019 and 3.7% in 2017, according to deal documents.
As a result, investors are far more comfortable with Vector’s latest offering than they were during the company’s last two market forays: in November 2019, for a USD 230m add-on to fund general corporate purposes, and October 2018 for USD 325m of 10.5% senior unsecured notes due 2026, which funded the redemption of the convertible notes due 2019 and general corporate purposes.
“The market is completely different now than when it was last time,” said one of the sources. “The market had just fallen in October 2018 and they had to get that deal done. Add the timing issue, with investors who are already spooked by a company that dishes out dividends, and you get a 10.5% coupon.”
Led by Jefferies, Vector is expected to price the new USD 850m eight-year non-call three secured notes today (12 January) after releasing price talk of 5.75%-6% this morning. Along with USD 32m of cash from the balance sheet, proceeds are slated to redeem the company’s outstanding USD 850m 6.125% senior secured notes due 2025.
Those existing notes traded yesterday at 101.75 to yield 1.891%, in line with recent levels, according to MarketAxess. The existing USD 555m 10.5% senior unsecured notes due 2026 traded 17 December at 107.97 to yield 6.815%, down slightly from trades at 108.474 in early December.
The company has three subsidiaries: Liggett Group, Vector Tobacco and New Valley. Liggett Group and Vector Tobacco make up the tobacco portion of the company’s revenues. Together, they make up the fourth-largest manufacturer of cigarettes in the US. The company’s real estate segment is known as New Valley and is the sole owner of Douglas Elliman Realty.
Pro forma the leverage-neutral transaction, the company is 4.9x levered through USD 292.5m of adjusted EBITDA and USD 1.432bn of total debt. On a secured basis, the company is 2.9x levered. Pro forma liquidity totals roughly USD 478m through USD 419.1m of cash and 58.8m of availability under the revolving credit facility.
One particular draw for investors looking at the deal—and a major driver of free cash flow—has been the company’s reduction of dividend payments, four of the sources said. Vector has reduced its dividend program to roughly USD 130m per year, compared to nearly USD 240m in 2019. The company is publicly traded on the NYSE—its stock trades at USD 12.80 per share for a market cap of USD 1.96bn.
If Vector maintains its less aggressive financial policy, sources expect revenue to grow as the company capitalizes on more people buying discount cigarettes to smoke at home while COVID restrictions are still in place. Meanwhile, pent-up housing demand is expected to benefit the company’s real estate business once restrictions ease.
Sources forecast roughly USD 300m to USD 340m of adjusted EBITDA for 2021, implying free cash flow of USD 49m to USD 89m (4.3% to 6.2% of total debt), once factoring in USD 13m of capital expenditures, USD 108m of interest expense and USD 130m of dividend payments.
Meanwhile, unadjusted free cash flow has increased over the last few years to USD 281m for LTM 30 September 2020, compared to USD 247m in 2019 and USD 227m in 2018, sources noted.
Because of the company’s varied industry exposure, there is no a perfect comp for sources to use for relative value. Instead sources looked to RR Donnelley for the tobacco business and Realogy for the real estate segment.
Vector’s secured notes should trade wide of RR Donnelley’s unsecured bonds, sources said—citing RRD’s more established market position and scale, and long-term regulatory hurdles from Vector’s less diversified exposure to the deeply discounted cigarette market.
The proposed notes should also come wider than Realogy’s unsecured notes, because of Vector’s niche exposure to the New York, California and Florida markets, three sources said.
RR Donnelley’s USD 318m 8.5% senior unsecured notes due 2029 last traded in size at 119.5 to yield 5.543% on 15 December, compared to trades at 117.75 to yield 5.787% in early December, according to MarketAxess.
Realogy’s USD 600m 5.75% senior unsecured notes due 2029 traded yesterday at 102 to yield 5.034%, after pricing at par earlier this week, according to MarketAxess.
A spokesperson for Vector declined to comment. Jefferies did not respond to a request for comment.