Capsugel takes PIK toggle baton, more on their way


By Natalie Harrison

NEW YORK, Oct 31 (IFR) - Capsugel, the Pfizer spin-offbought by private equity group KKR in 2011 and which makescapsules used for drugs, is the latest issuer to announce apayment-in-kind toggle structure that will fund a dividendpayment to its owners.

This year has seen the largest volumes of PIK structuressince the financial crisis, according to bankers, as privateequity firms look to extract value from assets at a time whenM&A activity still remains fairly lackluster.

Strong technicals in the market at the moment followingseven consecutive weeks of inflows also mean that issuers areable to sell riskier structures at attractive prices.

"There's no M&A and no refinancing, so that means nosupply," said one senior leveraged finance banker.

"That means issuers can try PIK toggles at a time wheninvestors want paper."

Capsugel's PIK toggle is the second of the week followingretailer J. Crew's USD500m drive-by deal on Monday that funded adividend to its owners TPG Group and Leonard Green & PartnersLP, who took the company private in 2010.

J. Crew's indirect parent company, Chinos IntermediateHoldings A, priced its deal at par to yield 7.75% after beingtalked in the 7.75% to 8% range with an original issuer discountat 99.5.

Goldman Sachs was lead left with bookrunners Bank ofAmerica, Morgan Stanley and Wells Fargo.

The banker said a handful of dividend recapitalization dealsin the leveraged loan market were being prepped for next week,and that the bond market could also see its fair share too.

Capsugel initially said it was looking to raise USD415m froma 5.5-year non-call one-year 144a senior PIK toggle note. Butfollowing a conference call with investors at 1030am NYT, thedeal was upsized to USD465m and price talk set at 7%-7.25% atpar.

Goldman is left lead, while UBS, KKR, Barclays, CreditSuisse, Deutsche Bank and Macquarie are also bookrunners. Booksclose at 130pm on Thursday, with the deal expected to priceafter that.


Capsugel has one bond outstanding, a 9.875% EUR325m August2019 issue, that was sold in difficult market conditions in July2011. The bond has performed well in secondary, bid at a cashprice of 111.5 on Thursday to yield around 7.4%.

"This is another example of a good company that hasperformed well. There is scarcity value in the name, and this isa good opportunity to pay cash to shareholders," said one marketsource.

The company was flagged by IFR as a potential PIK issuerback in August, following a 5.9% increase in second-quarterrevenues that was boosted by double-digit demand for alternativepolymer capsules plus the Encap acquisition.

Adjusted Ebitda of USD76.3m was well ahead of USD65.8m theprevious year, and the company's overall net leverage has fallenby more than two turns to 4.3x from 6.5x in mid-2011. That ledsome bankers to speculate that it might consider a new bond orloan deal to pay a dividend to KKR.

Preliminary adjusted Ebitda estimates for the nine monthsending September 30 are USD218.2m, up from USD200.9m in the sameperiod a year ago, according to the Offering Memorandum.

"Capsugel will no doubt have paid close attention to therecent ConvaTec dividend deal," said one banker at the time.

ConvaTec Healthcare sold a USD900m 6NC1 senior PIK toggle inAugust, which was upsized from USD800m and priced in line withtalk at 8.25% cash/9% PIK at 99.

That bond, which paid a cash dividend to shareholders, istrading at 101.5 to yield around 7.9%. Goldman Sachs was alsoleft lead on that deal. BofA Merrill, Deutsche Bank and MorganStanley were bookrunners.

One investor said that at 6.7x, ConvaTec was unlikely todelever quickly from free cashflow, but said that there was ageneral view in the market that the company would IPO at somepoint in the future.

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