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