LONDON, Feb 1 (IFR) - Payment-In-Kind toggles could be about
to hit European shores after two of the region's issuers
announced dollar deals this week in a move that some bankers
predict could be replicated with euro-denominated bonds.
Chemicals business Orion Engineered Carbons and education
provider Nord Anglia have structured slight variations of the
risky subordinated instruments that re-emerged in the U.S. late
in 2012 for the first time since the financial crisis.
Both deals will finance dividend payments to respective
financial sponsor owners Rhone Capital and Baring Asia Private
Equity, and give the issuers greater flexibility, and
potentially cheaper financing, than non-cash pay PIKs.
PIK toggles differ from the non-cash paying PIK deals, which
that are more familiar structures in Europe, in that issuers aim
to pay coupons in cash rather than in kind - providing that the
company has performed well and has enough money to do so.
The higher interest cost issuers bear if they do not pay
cash, acts as an incentive for them to structure deals in a way
that makes cash payments plausible.
"If the market remains in good shape, there is no reason why
PIK toggles couldn't work in euros for European issuers," said
one senior leveraged finance banker.
Luxembourg-based logistics company Dematic and specialty
chemical producer Taminco dipped their toes in the dollar PIK
toggle market last year. Like them, Orion and Nord Anglia have
timed their transactions to coincide with good market conditions
to achieve attractive pricing.
All four deals yield around 9%, and the various coupons step
up by either 50bp, 75bp or 100bp, if the issuer pays in kind
instead of cash.
The 6NC1 USD425m Orion deal, which was upsized by USD35m,
has a "pay if you can" structure. The issuer pays the 9.25%
coupon in cash if it has enough money, or 10% if it pays in
kind, although it must pay the first and last coupons in cash.
Goldman Sachs was physical bookrunner on the deal, while
Barclays, JP Morgan and UBS were joint bookrunners.
Nord Anglia, meanwhile, has a "pay if you want" structure.
It can pay all cash, all PIK, or a cash/PIK combination of
25%/75%, 50%/50%, 75%/25% respectively. To compensate investors
for that flexibility, the issuer must pay a larger 100bp step-up
for not paying a cash coupon.
The borrower's USD150m 5NC2 bond priced on Friday via sole
bookrunner Goldman Sachs, bang in line with guidance with a
coupon of 8.5% and OID of 98 to yield 9%.
BRIDGE TO EXIT
Although current market conditions are conducive to dividend
recapitalisations, PIKs can be more useful to extract value from
a business when companies face greater restrictions on cashflow
"The main difference between a dividend recap and a PIK deal
is that with a PIK you do not have to increase senior debt and
burden the operating company with a cash paying bond that could
add more stress to the company in terms of servicing its debt,"
the banker added.
The other benefit to issuers is their bespoke nature.
"It really all comes down to what the owners want to do in
6, 12 or 18 months time, and what restrictive payments from the
operating company to the holding company are possible, and then
it boils down to how you negotiate with investors," said the
Short-call features - usually 1 or 2 years - are a low
barrier for sponsors to hurdle if they want to exit.
That's certainly a prospect for Nord Anglia, another banker
The company's Ebitda has grown by a third to around USD80m
since its bond debut last March, and leverage has fallen by a
turn from 4.1 to 3.1 on the back of its booming Chinese business
and growing revenues in Dubai.
The company's enterprise value is estimated between 9 and 11
times Ebitda - or between USD720m and USD880m - a banking source
"There is still plenty of cash left post the dividend to
give investors an equity cushion, and it's not as cyclical as
other recent companies that have issued PIK toggles like Michael
Foods and Orion," said the second banker.
"It's also an emerging market play. So if the company has
grown this much already, it could soon have USD100m Ebitda,
which is perfect for an IPO. This is bridging a gap for an IPO
Baring also provided some reassurance that it would pay in
cash after injecting USD20m into the Holdco, which it has
pledged to pay the coupon, as well as USD4m of management fees
that it has not taken from the Opco over the past two years.
It has also pledged to use the annual USD2m management fees
to pay the cash coupon, and should have less restrictions on
cashflow movements between the group as a result of the
company's solid performance.
Some investors said they were open to PIKs and PIK toggles -
provided they are compensated enough for the risk.
"Effectively PIK toggles are Holdco subordinated bonds,
which is effectively equity sitting behind all senior secured
bonds and any other credit at the operating level," said one
"For that type of risk, I want something for that,
especially if the deal is small."
Nord Anglia's senior secured bonds are currently bid around
111 and are yielding 6.1%. "The pricing is fair on Nord Anglia,
but it's not giving much," the investor said.