Vehicle battery maker Clarios is on the road this week to sell a US$1.2bn bond offering that is part of one of the largest dividend recaps in the leveraged finance market in years.
Left lead Citigroup is approaching investors with a five-year non-call two senior secured offering that is expected to be rated B1/BB-/B+.
The US-based company, which is backed by private equity firm Brookfield, is issuing the bond alongside two seven-year term loan Bs that total US$3.3bn and are denominated in dollars and euros.
The US$4.5bn dividend recap follows a deal from UK-headquartered vehicle glass repair and replacement services company Belron, which hit the euro and dollar debt markets in October last year to make a €4.3bn (about US$4.4bn) payout to its owners.
Investors are typically reluctant buyers of debt to fund sponsors, but they have nonetheless selectively participated in such transactions of late amid a dearth of new money options.
Clarios, at least, appears to pass the buyside’s litmus tests for participation in such trades. Not only has it delevered in the runup to the dividend recap – cutting about US$2.1bn of debt between 2020 and 2024, according to Fitch – but it also enjoys strong cash flow generation.
During fiscal year 2024, the company generated some US$2.1bn in Ebitda and that jumps to US$3.1bn when tax credits are included, according to an investor presentation.
“The business can withstand that debt load, and I think the free cash flow will still be meaningful [even] with the burden from the dividend,” said a buyside analyst looking at the new bond.
The analyst sees the credit as a defensive way to play the auto sector, which is struggling amid the transition to electric vehicles and competition from China.
That is partly because much of Clarios’s profits are generated from selling to customers who need batteries for cars they already own rather than from the manufacturers of new vehicles. According to Fitch, roughly 80% of Clarios’s sales come from the global vehicle aftermarket.
“You are not nearly as dependent on cyclical auto sales,” the analyst said. “It is about car batteries and if people need a new one, and [Clarios] has about a third of that market.”
And as the world transitions to electric vehicles, cars will need more batteries, providing a positive tailwind for the company, the analyst said.
Even so, the dividend will impact the company’s leverage metrics. Moody’s expects its debt-to-Ebitda ratio to increase to 6x over the next 12-18 months from 4.5x at the end of September 2024.
Yet the severity of the spike in leverage ratios will depend on how Clarios uses a hefty US$1bn tax credit that it is entitled to under the Inflation Reduction Act. S&P said last week that the tax credit could offset the negative impacts of the debt increase.
However, not everyone was so certain.
“It is meaningful, but it could change under a new administration, and it is unclear how the cash would be used,” the buyside analyst said.
Indeed, S&P warned that if the tax benefit failed to materialize or was significantly reduced in size, it would likely cut its BB- rating, which was lifted from B+ in June last year.