Platinum-Backed Calderys Revives Risky Bond Structure for Investor Payout

(Bloomberg) -- Platinum Equity-owned Calderys is trying to revive a rarely seen, risky bond structure to repay investors in one of its funds. 

The company is selling $300 million of PIK toggle notes, a type of bond that gives the thermal protection company the option to defer interest payments, according to a person familiar with the matter who asked not to be identified because the information is private. PIK is an acronym for payment-in-kind, which in debt deals means paying interest with additional debt instead of cash.

The debt will be issued at the holding company level, a person said, a move that can help an issuer to take on more debt without running afoul of covenants. Holding company PIK toggle deals have been essentially absent from the US high-yield bond market in recent years as interest rates rose. 

A handful of issuers including chemicals company Innophos, concrete distributer White Cap, and building materials supplier US LBM sold such notes in early 2021 and also used proceeds to reward shareholders. The presence of risky structures like PIK toggle is typically a sign of strength — or froth — in debt markets. 

PIK Component 

Pricing discussions for the PIK component of the Calderys deal call for a rate of 75 basis points over the cash coupon, which has yet to be determined. The notes mature in June 2028 and are callable next June at 104 cents on the dollar, the person added. 

Bank of America Corp. is leading the transaction. An investor call is scheduled for 11 a.m. New York time on Tuesday, and the deal will be marketed through Thursday, with pricing thereafter, the person said. 

A representative for Bank of America declined to comment. Calderys and Platinum didn’t respond to a request for comment.

Private equity firms have increasingly turned to the debt market to borrow money and give the cash to shareholders in an environment where exiting portfolio companies can be difficult. Dividend recapitalizations in the leveraged loan market, where private equity sponsors conduct most of their financing, totaled more than $30 billion through June, according to PitchBook LCD data.

While funding distributions via holding company PIK toggle notes remains rare, other companies have turned to PIK debt in an effort to reduce interest costs. Firms including troubled rental car company Hertz Global Holdings Inc. issued notes with a PIK component this year, using proceeds from the offering to repay debt. Private credit providers also often offer PIK debt. 

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