CPI Card Group’s secured bond offering is drawing investor interest with a hefty coupon and a pandemic-driven earnings bump, in a yield-starved, issuer-friendly market, according to six sources following the deal. 

Lead Jefferies today launched the B3/B- USD 310m senior secured notes due 2026 at 8.625%, tight of official talk circulated earlier today in the 9% area and initial whispers at 9.25%. Books are oversubscribed and pricing is expected today.

Proceeds, along with cash on hand and a new USD 50m ABL due 2026, will refinance the company’s existing loans, which mature next year.  

Pro forma the deal, the company is 6.2x levered through USD 345m of total debt and USD 55.109m of LTM adjusted EBITDA.  

CPI, which manufactures debit, credit and prepaid payment cards, has benefited from stay-at-home guidance and health precautions stemming from the COVID-19 pandemic, as consumers shifted to contactless payment cards and online shopping, the sources said.

During 2020, the company’s sales for its debit and credit segment increased 17.5% year-over-year to USD 250.4m driven by a larger volume of higher-margin dual-interface card sales due to increased demand from new client wins and CPI’s existing client base, according to SEC filings. A shift to more online shopping also fueled demand for new cards throughout the year, according to a 17 December S&P report.  

Sources expect more consumers to be interested in migrating to a contactless card, but the secular pressures that the company was facing pre-pandemic still linger. That includes competition from Paypal, Square, Apple Pay and other platforms that don’t require a physical card, as well as the card renewal cycle getting longer, three of the sources said.  

S&P predicts that the secular decline in demand for new and replacement cards will take nearly five to seven years, in which the impact from upgrade cycles will become less, especially if digital payment platforms control the financial payment space.  

To offset those earnings pressures, growth potential lies in developing products that are not linked to a commoditized payment card, S&P said. 

If CPI continues to grow with its dual-interface cards and other offerings, then sources expect the company to generate USD 20m-USD 25m of free cash flow (6%-7% of total debt), given USD 60m-65m of adjusted EBITDA less USD 10m of capital expenditures and USD 30m of interest expense.  

On the other hand, if CPI steadies at current levels, then the company would generate USD 15m of free cash flow (4% of total debt) through USD 55m of adjusted EBITDA.  

Among possible comps, sources noted digital security company Oberthur Technologies and ATM manufacturer Diebold Nixdorf for relative value – though those two operators are much larger. 

Oberthur’s ‘B-‘ rated USD 758m Libor+375bps term loan due 2024 was quoted today at 98.8/99.6, implying a yield to three-year call of roughly 4.23%. 

Diebold’s lower rated (Caa2/CCC) unsecured notes – a USD 400m 8.5% tranche due 2024 – traded today 102.25 and a 6.369% yield, according to MarketAxess.  

Pro forma the new bonds, CPI’s liquidity will total roughly USD 36m, through USD 15m of ABL availability and USD 21m of pro forma cash.

2021 Debtwire