HC2 Holdings bond offering is attracting more interest than the issuer’s last foray in the market, given its recent focus on asset sales and paying down debt rather than continuing to execute tack-on acquisitions, according to five sources following the deal.

With the prospective notes, HC2 stands to substantially reduce its cost of capital, while clearing out most of the conglomerate’s near-term maturities, the sources said. 

After first premarketing with Jefferies, HC2’s proposed USD 300m senior secured notes due 2026 are talked at 8.5%-8.75%, at the tight end of early whispers circulated in the 8.5%-9% range. Books are set to close today at 1pm ET. 

Proceeds from the Caa1/B notes– as well as funds from its recent asset sale of its clean energy business Beyond6– will be used to redeem the company’s existing USD 342.4m 11.5% senior secured notes due 2021 and repay borrowings on its USD 15m Libor+ 675bps revolver due September 2021.

Pro forma interest is pegged at USD 30m, versus USD 44.8m prior to the transactions.

Sources project the company will generate roughly USD 5m of free cash flow (0.9% of total debt) in 2021, with estimates calling for USD 60m in annual adjusted EBITDA, less USD 25m of capex and the reduced pro forma interest.

The targeted 11.5% bond changed hands at a discount of 97 to yield 14.6% in early November, according to MarketAxess. As HC2 drew closer to finalizing the sale of Beyond6 to Mercuria Investments US for USD 169m– of which USD 70m is net cash proceeds– the B-/Caa1 rated notes popped to last trade at 100.625 with a 10.707% yield on 12 January. The asset sale closed on 15 January.

News of the refinancing also propped up the borrower’s USD 55m 7.5% convertible notes due 2022, which traded at 101.125 with a 6.603% yield yesterday, compared to 97 to yield 9.782% in late December, according to MarketAxess. 

The company placed the 11.5% bond and 7.5% convertible notes in November 2018 to refinance near-term debt. At the time, the original USD 535m single-tranche secured note offering went through structural and covenant changes before crossing the finish line. The reduced USD 470m 11.5% bond priced at an OID of 98.75 to yield 12%, with HC2 also adding on the covert note. 

Unlike the last go-around, eliciting interest in the latest deal, investors expect the company to use additional asset sale proceeds to continue paying down outstanding debt and enhancing liquidity. Meanwhile, previously the issuer remained focused on acquisitions.

Further, prospective high yield buyers are drawn in by steady performance in HC2’s construction segment and expected growth in its broadcasting and life sciences segments, the sources said.

In addition to selling Beyond6, HC2 closed on the sale of its telecommunications business ICS for USD 900,000 in October 2020, followed by a sale of four TV stations from its spectrum segment for USD 35m earlier this month. The company has also received an indication of interest to sell its insurance segment Continental Insurance Group for USD 90m.

Pro forma the deal, HC2 is 9.3x levered based on USD 57.2m of LTM adjusted EBITDA and USD 531.1m of total debt. Pro forma liquidity will stand at USD 95.8m through USD 80.8m of cash and an expected USD 15m undrawn revolver. 

The company receives a majority of its EBITDA from its construction segment, which brought in roughly USD 67m for the LTM period through 30 September, the sources noted. The lower USD 57.2m of consolidated adjusted EBITDA accounts for negative EBITDA reported in its life sciences, spectrum and non-operating corporate segments.

HC2 is a conglomerate with businesses spanning sectors such as infrastructure, clean energy, telecom and life sciences. Former CEO Phil Falcone was ousted last year amid activist pressure, after six years at the helm.

For relative value, the company’s infrastructure segment can be compared to Tutor Perini, although HC2’s existing notes trade much wider due its varied industry exposure, two of the sources said. 

Tutor Perini’s CCC+/B3 USD 500m 6.875% senior unsecured notes due 2025 traded yesterday at 102.625 to yield 5.618%, compared to trades at 97.79 to yield 7.477% on 23 December, according to MarketAxess. 

HC2 and Jefferies did not respond to requests for comment. 

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