NEW YORK, Aug 21 (IFR) - Investor push-back on a bond deal backing the buyout of KIK Custom Products by private equity firm Centerbridge Partners forced underwriters to sell the deal at one of the steepest discounts seen in the US high-yield market in the past few years.
The US$390m eight-year bond, issued via Kronos Acquisition Holdings, was sold to investors at a reoffer price of 89.57 to yield 11% - some 150bp wider than the mid-9% originally targeted.
According to Thomson Reuters data, only two high-yield deals have been priced at lower discounts to par over the past three years: a US$150m subordinated note offering backing Apollo’s US$1.3bn buyout of IT company Presidio, which was partly bought by Apollo itself at 80 cents on the dollar, and a US$250m note issue behind Apax’s takeover of teen clothing retailer rue21, which was sold by underwriters at a discount of 73.
The deal for KIK, a producer of private label cleaning and household products, came under intense scrutiny for its high leverage and for some of the adjustments made to Ebitda to reflect expected cost savings.
“There were a lot of add-backs (to Ebitda) people don’t believe in,” said one banker who had reviewed the company’s financials but decided to take a pass on the trade. “Investors are not buying it.”
The financing package, which also includes a US$850m seven-year secured term loan, will bring KIK’s leverage to around eight times, according to Moody’s - well in excess of the six times ceiling that US regulators regard as problematic under leveraged lending guidelines.
The company calculates a lower pro forma leverage ratio of 5.9 times after adjusting its Ebitda figure to take into account US$40m in future cost savings.
Covenants on the deal were tweaked during marketing to further limit the ability of the company to incur new debt.
According to rival bankers, underwriters had guaranteed the issuer a maximum coupon of 9% and are probably sitting on heavy losses, even after accounting for the fees they received on the trade.
The deal’s cold reception cast some doubts over the outlook for leveraged buyouts at a time of heightened volatility and widening spreads for the high-yield asset class.
“There is an overall lack of appetite for high-beta Triple C rated issuance,” said Darren Hughes, a portfolio manager at Invesco. “We don’t need to buy 11-handle deals when we can buy Single B rated names we already like that are trading at 6% or even 7%.”
Another leveraged finance banker away from the trade said that even though KIK’s high leverage had been a concern for his bank as a potential underwriter, investors had been far more lenient on other occasions.
“The market buys this kind of deal all the time,” said the banker. “The fact that it wasn’t receptive here is a little surprising to me.”
The US$850m term loan running alongside the bond issue cleared the market at 500bp over Libor with a 1% floor, after initially being guided at a range of 450bp-475bp over. The discount was revised to 97.5 from 99 originally.
Barclays was the lead underwriter on the financing, with BMO, Nomura and Macquarie on the right.
This story features in the August 22 issue of IFR Magazine, a Thomson Reuters publication
Reporting by Davide Scigliuzzo; Editing by Matthew Davies