Apollo, Platinum Pitch Risky PIK Junk Bond Sales to Fund Payouts

(Bloomberg) -- Apollo Global Management Inc. and Platinum Equity are testing the strength of the junk bond market with one of the riskiest types of financings that will allow the private equity firms to fund payouts.

Aspen Insurance Holdings Ltd., which Apollo bought in 2019, is selling $500 million of payment-in-kind toggle notes, which gives the borrower the option to delay interest payments until the bond’s final maturity, according to people familiar with the matter.

The debt, expected to price later this week, will let the buyout firm take a $238 million dividend, give the company the same amount for liquidity, and pay fees related to the deal, according to a copy of the offering memorandum shared with investors and seen by Bloomberg. Early pricing discussions for Aspen’s five-year notes are in the high-7% range, and Jefferies Financial Group Inc. is leading the sale.

Platinum, meanwhile, is marketing a $500 million PIK toggle for label company Multi-Color Corp., said the people, who asked not to be identified because the transaction is private. Early pricing discussions for the five-year offering, also slated to price this week, is 12% if interest is paid in cash, and an additional 0.75 percentage point if paid with more debt. Bank of America Corp. is leading the sale. The entire proceeds will be used for the payout and related expenses, according to a copy of the offering memorandum.

Representatives for Apollo, Aspen, Bank of America and Jefferies declined to comment. Representatives for Multi-Color and Platinum didn’t respond to requests for comment.

Red Hot

The private equity firms are hitting the market at a time when investors are snapping up all sorts of risky deals, including debt for companies hoping to stave off bankruptcy such as Ligado Networks LLC’s recent $3.85 billion PIK offering. The leveraged loan market has also seen a surge in dividend recapitalizations.

Portfolio managers are being spurred to seek out higher-yielding assets amid expectations that the Federal Reserve will keep rates low to support the economy during the Covid-19 pandemic.

Junk-bond yields, meanwhile, have dropped to 5.28% and are close to record lows. That’s driving private equity firms to cash in on some of their investments by yanking dividends out of corporations to cut their risk and realize gains sooner.

But the stakes are high for potential buyers of the debt. As well as running the risk of not getting paid interest, they could also get relatively little back in the event of a restructuring since both the Aspen and Multi-Color bonds are issued at holding company levels, which are lower in the pecking order for repayment if the businesses fail.

“PIK toggles are usually God’s way of saying to take a step back,” said Leland Hart, co-chief investment officer at Alcentra. “It does show you’ve got appetite for different strata of risk in the market, which is ultimately healthy,” he added.

Back Again

Platinum, the Beverly Hills, California-based firm backed by billionaire Tom Gores, has long taken advantage of red-hot debt markets to help cut its equity risk in the companies it buys. In February, it sold $460 million of PIK toggle notes to recoup more than half of its 2018 investment in Husky Injection Molding Systems, which makes manufacturing equipment for plastics packaging.

Platinum agreed to buy Cincinnati-based Multi-Color in a deal valued at $2.5 billion in 2019, and merged it with a company it already owned. The firm financed the purchase with $2.6 billion of debt, some of which struggled to sell amid concerns about the deal’s high level of indebtedness and estimated cost savings.

The company’s 6.75% and 10.5% bonds have since soared to around 107 and 108.5 cents on the dollar respectively, according to Trace data, and the business has overall performed well since the buyout. Multi-Color has realized tens of millions of dollars in cost savings and expects revenue to increase by up to 2% year-over-year for the quarter ended on Sept. 30 despite the impact of Covid-19, according to bond documents.

Read more: Platinum-owned label maker offers riskier PIK bonds for payout

PIKs can turn out well if the debt is paid off from the proceeds of a sale or an initial public offering. Pharmaceutical research company PPD Inc. did just that earlier this year, turning a quick profit for investors that bought the debt that funded a $1 billion dividend to the company’s sponsors Hellman & Friedman and Carlyle Group.

Still, Multi-Color’s holding company debt load will be 7.9 times a measure of its earnings following the deal, according to bond documents.

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