By Natalie Harrison
LONDON, Nov 19 (IFR) - Private equity firm Terra Firma plans to take full control of Annington Group by funding the remaining stake it does not own with a GBP500m Payment-In-Kind (PIK) bond, market sources said on Monday.
Marketing for the 10-year PIK, callable after five years, will begin on Tuesday via sole bookrunner Barclays. The bond, to be issued out of Annington Finance, is expected to be rated Caa1/CCC+.
Annington's current debt structure restricts it from paying dividends, and therefore would have made it difficult for a new high-yield bond to be raised. However, because PIKs are non-cash paying, with interest accruing on the company's balance sheet, the existing debt pile can remain in place.
"The PIK will enable all cash to go to senior bondholders," said one market source.
Terra Firma said on Monday it had agreed to buy Annington Homes from Nomura International in a deal worth GBP3.2bn (USD5.1bn), and said the acquisition should complete by the end of the year.
The enterprise value of GBP3.2bn is made up of GBP1bn pounds of new equity and debt financing, and assumed existing debt of GBP2.2bn.
"Annington is an outstanding success story," said Guy Hands, chairman and chief investment officer of Terra Firma.
"It is a pure play UK residential property company with a blue chip tenant on a lease of over 180 years and with the ability to benefit from the strength of the property market. We look forward to working with Annington's management as it moves on to the next stage in its development."
Terra Firma originally bought Annington in 1996 when Guy Hands, the founder of the private equity company, worked at Nomura. Terra Firma has been managing the company for the Japanese bank.
Annington Homes became one of the largest private owners of residential property in the UK when it purchased the Married Quarters Estate from the Ministry of Defence (MoD) in 1996. Annington leases the majority of its properties back to the MoD to provide accommodation for service families.
There have been only a handful of PIKs to price in Europe this year, with the deeply subordinated instruments often treated with disdain by investors because they are considered bull market instruments.
However, last week private equity firm BC Partners priced a EUR250m PIK for Swedish cable company Com Hem.