Finnish specialty paper maker Ahlstrom-Munksjo sent out initial price thoughts for a €650m-equivalent dual-currency bond backing its buyout on Thursday, as analysts slammed the deal's covenant package.
The company approached investors on Monday with a senior secured seven-year non-call three deal split between a €400m euro note and a US$305m (€250m) US dollar bond. IPTs were later sent out at 4%-4.25% and 5%-5.25%, respectively.
A consortium comprising Bain Capital, Ahlstrom Invest and Viknum made a public tender offer for all the shares in Ahlstrom-Munksjo in September, valuing the company at about €2.1bn. The owners are putting €1.12bn into the business, and have also raised a €1bn term loan due 2028 for the acquisition.
Ahlstrom-Munksjo is not a straightforward paper credit - instead of commoditised markets, it produces fiber materials to serve specific needs of various industries including filtration materials for car engines. That allows the company to justify higher price points and to pass through price rises to clients more easily, said Spread Research analysts.
Investors speaking to IFR said they liked the specialised nature of the business - and the fresh capital going into it.
However, high-yield analysts are sounding the alarm about the deal's covenant package, which they say is the most aggressive seen in Europe this year.
"The notes are being marketed with an extremely aggressive sponsor covenant package incorporating a number of loan-style covenant provisions typically seen in the most aggressive top-tier deals," Covenant Review analysts wrote in a report published on Wednesday.
"Convoluted and over-permissive calculation flexibilities include material debt exclusions, the right to cherry-pick testing dates and permissive Ebitda add-backs, leaving ample scope for the company to manipulate covenant calculations in its favour."
"The docs allow the company to pay out more dividends than would be typical on a normal high-yield deal," said Steven Hunter, chief executive of high-yield analytics firm 9fin.
"Essentially on our reading of the docs, they allow the company to pay dividends or restricted payments to a very high level if it refinances the pref instrument which is already in the company's capital structure," said Hunter.
Usually high-yield deals have a leveraged-based test for restricted payments - i.e., if the company delevers to a certain point then it is allowed to pay dividends up to the sponsor. Ahlstrom-Munksjo's deal includes that leverage-based test - but also says that if the pref is repaid, it becomes an interest-coverage test, which is much easier to satisfy.
In addition, the amount that the company can pay out as dividends is up to a so-called "available amount" - a concept imported from the leveraged loan market. It includes any money put into the company - but also from any of the debt baskets. That also has the effect of allowing to pay the company more in dividends than would be typical.
Ahlstrom-Munksjo's covenants package puts it in the same ball-park as Merlin, Refinitiv and ThyssenKrupp - leveraged buyouts that were also seen as including very sponsor-friendly provisions, said Hunter.
Push back
A source familiar with the transaction said that there has been push-back from larger accounts on the sponsor-friendly elements of the covenant package.
While a banker on the deal said it was fairly standard in new leveraged buyouts for there to be a bit of tension between accounts and the documents they are offered.
"For Ahlstrom-Munksjo, accounts are being diligent in reviewing the docs and providing commentary (as they always do) on what aspects of the docs they would like to see changed," said the banker. "However, it doesn't stand out to be as being any more forceful or numerous than normal. And it certainly hasn't slowed down the bookbuilding."
Investors that IFR spoke to seemed more concerned about the company's leverage.
"Ahlstrom looks like a reasonable business, but the key thing in this deal is the change in ownership with the public-to-private transaction and the releveraging as part of that," said one high-yield investor. "There's definitely a step-change in leverage. But there's a difference between reported versus adjusted Ebitda so you have to look carefully at the company's true starting leverage."
Pro forma the transaction, Ahlstrom-Munksjo has reported a net leverage of 4.1x as of the end of 2020. However that is based on an adjusted Ebitda, which includes the expected full-year impact of cost-saving measures and normalisation of the Covid-19 impact, noted Spread Research analysts.
"Adjusted for pension, factoring and the minority equity stake to be acquired, we compute a high net leverage of 6.5x (based on the FY20 Ebitda of €334m)," wrote analysts. "However, we anticipate some deleveraging going forward, driven by the expected ramp-up in Ebitda and modest free cashflow."
The investor said that he saw the company's leverage in the high 5s.
"Ahlstrom is also quite exposed to the cost volatility in the pulp market, but appears to have managed it historically quite well," he said.
Goldman Sachs (B&D) and BNP Paribas are joint global co-ordinators and bookrunners on the US dollar notes - and also the euro notes alongside Nordea Bank, which is Nordic coordinator. Leads kicked off calls with investors on Monday.
A spokesperson for Bain Capital declined to comment.
Moody's and Fitch have assigned Ahlstrom's holdco, Spa Holdings 3, debut ratings of B2/B+ (stable/positive).