REFILE-Platinum's rapid LBO exit stuns high-yield market

Fri Feb 14, 2014 6:11am EST

By Natalie Harrison and Mariana Santibanez

NEW YORK, Feb 14 (IFR) - A super aggressive Payment-In-Kind toggle issued by BlueLine Rental this week could embolden more private equity firms to use the bond market to cash out of assets at breakneck speed, and bankers to underwrite leveraged buyouts with riskier terms.

Financial sponsor Platinum Equity has now recovered all the cash it stumped up to buy Volvo subsidiary BlueLine just two months ago, after using the proceeds from the USD252.5m bond to pay itself a dividend.

The speed Platinum was able to recoup the USD201m equity it paid as part of the USD1.1bn acquisition in December of Volvo Construction Equipment Rents (VCE), since renamed BlueLine Rental, was what really grabbed the market's attention.

Investors usually want to see evidence that the business is performing under a new owner, but limited proof of that did not stand in their way when considering the BlueLine deal.

"It will definitely encourage more issuers to do Holdco PIK dividend deals," said a banker.

Holdco PIKs made a big comeback last year, and bankers say they are continuously pitching the instruments, which are risky because they give issuers the flexibility to skip cash coupons if they run into difficulties.

Fitch puts post-crisis US PIK volumes at around USD14.8bn in 2013 - the third highest year on record behind 2007 and 2008, which saw USD16.2bn and USD14.9bn, respectively.

Bankers are now hoping they can boost fees, given that the lead time for issuing a PIK post-LBO seems to be shrinking.

And it might also encourage underwriters to ensure they snare what is still a limited number of LBO opportunities out there, by offering more issuer friendly terms.

"It's given us another data point, and shows that high-yield is very attractive," said the first banker.

"It's likely to make banks more aggressive on what they are prepared to underwrite. There are fewer deals to go round, and banks need to make money so they will compete on flex terms and bond cap rates."

Looser terms like that, which work in the issuer's favor, could of course leave banks potentially more exposed to losses if market conditions deteriorate rapidly. But some may decide it's a gamble worth taking.

STAGGERING SPEED

Bankers said Platinum's swift exit was nothing short of staggering, and something that has not been seen since before the financial crisis.

The bulk of financing for the LBO, a USD760m senior secured high-yield bond, was issued only a month ago, and the ink is barely dry on the acquisition itself.

"Taking out 100% of the equity just a couple of weeks after closing the acquisition is about as aggressive as it gets," said one senior leveraged finance banker.

"And it had a ton of demand."

Orders were in excess of USD2bn, and it turns out that investors who bought the January bond deal, and who were pretty happy with its 4.5 point rally, were the drivers of the PIK.

"People feel in this kind of economic cycle that the company has some good operating momentum, which will help improve Ebitda and enable it to deleverage," said another banker.

The PIK raised leverage by about a turn to some 6.5 times Ebitda. BofAML was left lead, with joint bookrunners Barclays, Goldman Sachs and Morgan Stanley.

One investor compared the deal to United Rentals, a larger company and a leader in the sector, whose bonds he said were trading at 5.7 times Ebitda.

"BlueLine, through a PIK toggle, issuing beyond the market leader in the space is aggressive," the investor said.

"The sponsor will essentially own a highly levered company for free, and if they operate it properly they can get a return of 2x-3x investment."

PLENTY OF CUSHION

Some were more cautious, though, saying that underwriting practices were still pretty disciplined, and that sheer pressure from regulators meant that it was unlikely to see anything too reckless getting done.

One of the bankers also said that the BlueLine deal wasn't something that could be easily copied. He said investors may have taken a view that Platinum bought the business cheap from Swedish truck maker Volvo, and therefore believed there was enough of an equity cushion below the PIK.

"There are still risks with the integration, but the sector has low valuations and the business was built organically, is doing well, and has strong growth potential," said one investor.

Platinum is also well respected by the buyside.

It has a strong track record, taking its equity out of specialty equipment rental company NESCO back in 2012, just a few months after buying the company, and making a complete exit in December after selling it to Energy Capital Partners.

It has also raised a combined USD435m from two Holdco PIKs for aluminum maker and supplier Chassix and packaging firm Bway over the past year.

Regardless, the hunt for yield is as strong as ever and investors just couldn't turn down the 9.75% cash coupon. If follow-on issuers are prepared to pay up, they too might have similar success.

"I'd say it's pretty unique, but it comes cheap because of how quickly it came to market," said the second banker.

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