Issuers cast wider net in recent wave of unsecured PIK toggle loans, capital markets banker asserts

By Paul A. Harris

St. Louis, Jan. 26 - Three holding companies have funded dividends to equity sponsors by means of novel institutional loans called unsecured PIK "toggle" loans since the beginning of the year.

In each of the three cases the loans closely resembled high-yield floating-rate PIK toggle notes.

Each priced at a slight discount with terms that specify a cash-pay coupon and a PIK coupon that is typically 75 basis points higher than the cash-pay coupon.

Further, high-yield syndicate desks and sales forces took part in all three transactions.

Most recently, in a deal led by Credit Suisse and Citigroup, Memphis-based Verso Paper Finance Holdings LLC priced a $225 million six-year senior unsecured PIK toggle loan at 99.00, paying a cash-pay coupon of Libor plus 625 bps.

Earlier in the month Norwalk, Conn., membership and loyalty program operator Affinion Group Holdings, Inc. priced a $350 million unsecured PIK toggle term loan (Caa1/B-) at 99.00 with a cash-pay coupon at a 625 bps spread to Libor. Deutsche Bank Securities Inc. and Banc of America Securities LLC ran the books.

Earlier still Italy's Prysmian Cables & Systems priced a similarly structured €800 million PIK toggle loan at 99.50 with a cash-pay coupon of Libor plus 675 bps.

On Friday a senior capital markets banker who was close to one of these transactions told Prospect News that the loans essentially differ from senior unsecured floating-rate PIK toggle notes in name only.

The source, who agreed to speak on background, added that the loans, which are being marketed by means of a combination of bank and bond sales forces, come with 100% high-yield incurrence-based covenants, as opposed to loan covenants.

Liquidity not an issue

The senior capital markets banker also said that as far as investors are concerned the liquidity of bank loans versus high-yield notes does not seem to factor into the current unsecured PIK toggle loan transactions.

Whereas bank loans were once perceived as being less liquid than high-yield bonds, the banker said that in the current markets that perception does not exist.

"Investors do not have a view that loans are any more liquid or illiquid than notes," the source asserted.

"That just speaks to the robust market we're in right now."

A bank loan investor who also spoke to Prospect News on Friday also said that the liquidity of loans has increased dramatically.

"The liquidity of bank loans is heavily underestimated," the investor said.

"There is over $200 billion in secondary trades. The bid-ask spread has started to tighten in in bank loans from a half to maybe three-eighths. And a lot of them are at a quarter, versus high-yield bonds, which people perceive as more liquid, where the bid-ask spread is a half, and often larger.

"It's very easy to sell bank loans," the investor said. "It's very hard to buy them."

This investor went on to say that the bank loan market remains slightly less liquid than the high-yield bond market but added that over the past two years there are a lot of bank loans that are a lot more liquid than a lot of high-yield bonds.

A wash for the issuer

The senior capital markets banker said that issuers do not necessarily benefit from issuing via the senior unsecured PIK toggle loan structure versus issuing in a similarly structured floating-rate note.

However, the source said, the loan structure casts a wider net with regard to investors, which might be a benefit to the issuer on the margin.

Investor base

With regard to the type of investors getting into these PIK toggle loan deals, the banker verified a perception that is widely held in the leverage markets at present: the hedge funds are playing in these transactions.

However, among the 50 accounts that played the deal in which this source participated there were traditional high-yield money managers and loan funds as well.

With regard to the high-yield accounts, the banker pointed out that if you own the issuer's underlying securities - the senior notes or the senior subordinated notes - and you understand the credit and the leverage, the senior unsecured PIK toggle loans are a natural extension of a way to gain some yield.

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