By Natalie Harrison
NEW YORK, Oct 31 (IFR) - Capsugel, the Pfizer spin-off bought by private equity group KKR in 2011 and which makes capsules used for drugs, is the latest issuer to announce a payment-in-kind toggle structure that will fund a dividend payment to its owners.
This year has seen the largest volumes of PIK structures since the financial crisis, according to bankers, as private equity firms look to extract value from assets at a time when M&A activity still remains fairly lackluster.
Strong technicals in the market at the moment following seven consecutive weeks of inflows also mean that issuers are able to sell riskier structures at attractive prices.
"There's no M&A and no refinancing, so that means no supply," said one senior leveraged finance banker.
"That means issuers can try PIK toggles at a time when investors want paper."
Capsugel's PIK toggle is the second of the week following retailer J. Crew's USD500m drive-by deal on Monday that funded a dividend to its owners TPG Group and Leonard Green & Partners LP, who took the company private in 2010.
J. Crew's indirect parent company, Chinos Intermediate Holdings A, priced its deal at par to yield 7.75% after being talked in the 7.75% to 8% range with an original issuer discount at 99.5.
Goldman Sachs was lead left with bookrunners Bank of America, Morgan Stanley and Wells Fargo.
The banker said a handful of dividend recapitalization deals in 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 from a 5.5-year non-call one-year 144a senior PIK toggle note. But following a conference call with investors at 1030am NYT, the deal was upsized to USD465m and price talk set at 7%-7.25% at par.
Goldman is left lead, while UBS, KKR, Barclays, Credit Suisse, Deutsche Bank and Macquarie are also bookrunners. Books close at 130pm on Thursday, with the deal expected to price after that.
Capsugel has one bond outstanding, a 9.875% EUR325m August 2019 issue, that was sold in difficult market conditions in July 2011. The bond has performed well in secondary, bid at a cash price of 111.5 on Thursday to yield around 7.4%.
"This is another example of a good company that has performed well. There is scarcity value in the name, and this is a good opportunity to pay cash to shareholders," said one market source.
The company was flagged by IFR as a potential PIK issuer back in August, following a 5.9% increase in second-quarter revenues that was boosted by double-digit demand for alternative polymer capsules plus the Encap acquisition.
Adjusted Ebitda of USD76.3m was well ahead of USD65.8m the previous year, and the company's overall net leverage has fallen by more than two turns to 4.3x from 6.5x in mid-2011. That led some bankers to speculate that it might consider a new bond or loan deal to pay a dividend to KKR.
Preliminary adjusted Ebitda estimates for the nine months ending September 30 are USD218.2m, up from USD200.9m in the same period a year ago, according to the Offering Memorandum.
"Capsugel will no doubt have paid close attention to the recent ConvaTec dividend deal," said one banker at the time.
ConvaTec Healthcare sold a USD900m 6NC1 senior PIK toggle in August, which was upsized from USD800m and priced in line with talk at 8.25% cash/9% PIK at 99.
That bond, which paid a cash dividend to shareholders, is trading at 101.5 to yield around 7.9%. Goldman Sachs was also left lead on that deal. BofA Merrill, Deutsche Bank and Morgan Stanley were bookrunners.
One investor said that at 6.7x, ConvaTec was unlikely to delever quickly from free cashflow, but said that there was a general view in the market that the company would IPO at some point in the future.