Platinum Equity-owned label maker pulls risky PIK deal

Platinum Equity-owned label maker Multi-Color Corporation has pulled a proposed sale of a risky “payment in kind” note, signalling that the soaring demand from investors for US corporate bonds has its limits.

The $500m deal had been seen as one of the most aggressive to be brought to market during the post-March financing boom, in which supportive central bank policies have pushed down borrowing costs and led investors to accept increasingly risky deals. 

The PIK note would have given the company the option to defer interest payments until the bond’s maturity, while the proceeds would have been used to fund a payment to the company’s private equity owners. 

The bond had been pitched to investors with an interest rate of more than 12 per cent, rising to about 13 per cent if the company chose to pay interest at the end of the note’s life, according to people familiar with the deal terms. But it failed to capture enough demand from investors to proceed, according to people with direct knowledge of the financing. 

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“It is a sign of the froth in the market, when you see these low-rated PIK deals come to market to fund dividend payments to the private equity sponsors,” said John Dixon, a high-yield bond trader at Dinosaur Financial Group. “The fact this deal was pulled is rational.”

Platinum Equity did not immediately respond to a request for comment. Bank of America, which led the fundraising, declined to comment. 

Anatomy of a PIK deal

  • PIK notes allow a company to defer interest payments until the bond matures.

  • The interest is paid “in kind” by being added to the principal of the bond, with the debt’s interest effectively being paid with more debt.

  • The notes are associated with deeply distressed issuers who need extra cash to survive, but would struggle to immediately begin paying investors interest on the debt.

  • The debt typically sits low down in a companies capital structure, putting it at greater risk of being wiped out should the company slip into bankruptcy.

  • “PIK toggle” deals allow issuers to switch between paying coupons and paying in kind.

The Platinum Equity-backed bond is not the only one to attempt to take advantage of rampant demand in the corporate bond market. Apollo-owned Aspen Insurance borrowed $500m through a PIK deal last week, with roughly half the funds being used to fund a dividend. That followed a spate of loan deals to finance dividends for private equity owners.

Companies have been rushing to secure financing ahead of the US presidential election next week, given the potential for an uptick in volatility. Three junk-rated companies sold a total of more than $1bn of bonds on Monday, with eight other deals expected to cross the line this week.

“We are seeing a sprint to issue bonds pre-election,” said John McClain, a portfolio manager at Diamond Hill Capital Management. “Investors are drawing bright lines in the sand around businesses they are comfortable financing and deals that are susceptible to the potential volatility we expect to see.”

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