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Ardagh strips out pre-IPO dividend with aggressive PIK
June 6, 2014 / 2:40 PM / in 3 years

Ardagh strips out pre-IPO dividend with aggressive PIK

* Risky bond delivers dividend to shareholders

* Deal dubbed “cheap IPO bridge” by investors

* Concerns raised due to past IPO delays

By Robert Smith

LONDON, June 6 (IFR) - A buoyant high-yield market helped Ardagh strip out a dividend of around 100m with a new payment-in-kind (PIK) bond on Thursday, which one high-yield investor dubbed “probably the most aggressive deal of the year.”

The transaction came after Ardagh promised at the end of May that it would finally deliver on its long-awaited IPO next year, which could see the PIK being repaid given it is clearly structured for an IPO take-out.

The deal’s success came despite some investor scepticism over the prospects for an IPO and the substantial leverage that the new US$1.05bn-equivalent PIK will add to the company.

“They’re taking advantage of a red-hot credit market to put in place a cheaper IPO bridge without diluting themselves,” said the investor.

He argued that the new PIK was used as an alternative to equity raising, as Ardagh has scrapped plans to raise equity privately before the IPO. A banker close to Ardagh, however, said that the planned convertible was unattractive as ratings agencies were unlikely to give it equity credit.

While the PIK note avoids shareholder dilution, it does leverage up the company substantially. In the 12 months ending March 31, Ardagh’s ratio of net debt to Ebitda stood at 5.8x. Following the PIK, its ratio of adjusted net debt to Ebitda will stand at 6.7x.

The total debt multiple is important, as investors will be mindful of the enterprise value Ardagh could achieve in an IPO. US sector peer Owens-Illinois trades on an EV to Ebitda multiple of 9.3x, according to Thomson Reuters data.

“As long as they maintain this kind of leverage, it’s hard to see what room is left for equity value,” said a London-based portfolio manager.

Ardagh has said that it will reduce leverage to 5x before the IPO, partially through boosting Ebitda to 948m.

DUBIOUS RECORD

Ardagh’s history of delaying its listing has left some investors uneasy.

The company burnt through 8.7m in “aborted IPO costs” in 2010, according to its accounts, and since then it has announced, and then delayed an IPO several times.

After the firm acquired Anchor Glass in 2012, it indicated to investors that it was now focused on its listing plans. Mere months later, however, it raised a US$1.45bn-equivalent debt package to buy Verallia North America, a deal that languished in regulatory limbo for over a year.

The company’s management said on an investor call last week that it is not looking at any more acquisitions and is now entering a period of consolidation. Later on, however, management said that if the rest of Verallia came on the market then they would take a look at it.

“We’re not prepared to allow that particular project to disturb our timeline for the IPO,” said chairman Paul Coulson.

This has done little to reassure some bondholders though.

“In the past they said that acquisitions will coincide with an equity offering, but as long as debt markets have afforded them the ability they’ve taken advantage of it,” said one.

Investors were coaxed into this week’s trade with an original issue discount (OID) of 99, leaving more room for upside. An equity claw allows Ardagh to repay 50% of the bonds using equity proceeds at 102 until the end of 2015, with the rest callable at just over 104 after two years.

One investor that if you looked at the bond as two-year paper taken out at these levels, it should offer a double-digit internal rate of return.

AGGRESSIVE STRUCTURE

As with Ardagh’s past bond issues, Citigroup was sole bookrunner on the deal. On Wednesday evening the company announced a US$1bn-equivalent five-year non-call two senior PIK in dollars and euros, primarily to refinance its outstanding 11.125% secured 2018 PIK, which has accreted to 643m in size.

The outstanding PIK becomes callable this month, and Ardagh indicated in its results presentation last week that it was considering refinancing it. Ardagh initially said that it would also use the new PIK to return 73m to shareholders.

By Thursday, however, investor demand allowed Ardagh to increase the deal size by US$50m, ratcheting up the dividend to around 100m. Price talk was set at 8.75% on the dollar and 8.5% on the euro tranches, with both expected to come at OIDs of 98 to 99.

The bonds then priced with OIDs of 99, with an 8.375% coupon on the EUR250m tranche and 8.625% on the USD710m tranche.

The PIK uses an aggressive “pay-if-you-want” structure, whereby the issuer can freely choose to pay coupons in cash or with more debt. Most recent PIKs in Europe have followed the stricter “pay-if-you-can” toggle structure, where the issuer has to pay cash if possible, subject to certain tests.

Coupon payments are of no concern to buyers able to book a quick profit on the break, however. The timing of the deal coincided perfectly with the credit rally following the ECB rate cut, and the notes soared to a 102 cash price bid in the secondary market on Friday morning. (Reporting by Robert Smith, Editing by Helene Durand, Julian Baker)

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