Isabel Marant has printed the first dividend recap deal in the euro high-yield market in well over a year, seizing on a shift in investor appetite for risk.
The French luxury brand, founded in 1994, raised €15m more than its initial target, issuing a €265m five-year non-call two senior secured note.
The bond (B2/B) priced at par to yield 8%, with strong demand enabling JP Morgan - which was global coordinator and sole physical bookrunner as well as B&D - to revise price talk downwards multiple times. Talk was first set at mid 8s when the deal was announced on Monday, then lowered to 8.25% area and again to 8%-8.25%, before final pricing.
Speculative structures such as dividend recapitalisations disappeared completely from the high-yield market last year due to rock-bottom investor appetite for risk amid rising interest rates, volatility and recession fears. However, a rally boosting risky assets since the beginning of the year has emboldened dealers and borrowers.
"It was a bold move with a lot of risk associated with the execution," one source with knowledge of the transaction said, noting that discussions with the sponsor were held in January. The view was that a thin pipeline coupled with hefty cash holdings by investors would extend the window of issuance into February, he said. "The market reading was correct."
The transaction got another boost from the European Central Bank's policy announcement on February 2, which fuelled optimism that the cycle of interest rate rises may be near the end, prompting the market to rally further. This translated in strong appetite for the bond. Half of the book was made up of new investors in the name, of which some have had exposure to the name in the past, the source said. "It was a high-quality book made up of tier-one real money investors."
Based on the initial €250m deal size, the company planned to use almost a quarter of the proceeds from the deal, or €60m, to fund a shareholder distribution, €181m for refinancing existing notes and an estimated €9m to pay related transaction fees and expenses.
"The deal needed to get bigger to be done. There wasn't any moaning about the dividend recap," the source said, adding that the fact that small portions of the bond being refinanced had been paid down together with the company's strong cash generation and its strong cash on balance sheet gave the deal an edge.
"The increase in the coupon was minimal compared with recent refinancings. New issue premium was zero or slightly negative," he said.
"Dying for yield"
One high-yield investor, unsurprised by the return of one of the most bullish trades in the market, said banks will take advantage of the strong credit rally to bring to the market all sort of deals in an effort to rack in fees and make up for lost revenue last year.
“The market is suddenly dying for yield. Very clever from the dealer's point of view,” he said. “I am not going to buy it but I’m sure people will close their eyes and buy it.”
Asked whether other firms could mimic Isabel Marant's trade, he said: "Absolutely. It's a bid-only market and these things happen when people are chasing stuff."
Other investors also voiced reluctance to fund dividend recaps, saying that it was a strong pass for them.
Still, other similar transactions could follow according to the source.
"It's possible to bring dividend recaps to the market," the source said. He although stressed that the imminent start of the blackout earnings period might prove a near-term restraint.
Italian gambling company Lottomatica printed the last dividend recap in November 2021, a €400m five-year non-call two PIK toggle note. The trade came with a 8.125% coupon through its holding company Gamma Bondco to pay a dividend to its owner, Apollo shareholders. A few months earlier, German TV shopping channel HSE printed two senior secured euro tranches to help fund a dividend payment to private equity owner Providence Equity Partners.
Isabel Marant is owned by French private equity firm Montefiore Investment, which holds a 50.3%, stake, while the remaining 49.7% is owned by the brand’s founders and managers.
Pro forma for the transaction, Isabel Marant's net leverage will be 2.8 times based on recurring Ebitda of €90m in the last twelve months to September 30, 2022, according to the company presentation.
The clothing firm last tapped the euro high-yield market in February 2020, raising €200m in a 6.625% 5NC2 bond to refinance its bank debt and also fund a dividend.
Updated story: Adds comments from a source