Banks Swallow The PIK-Toggle Price

Banks last month continued to slowly sell down their exposure of hung LBO bridges, and the underwriters are learning just how much the market no longer likes PIK-toggle notes.

Once the flavor of the day for LBO debt, payment-in-kind-toggle notes allow issuers to defer cash interest payments by issuing new debt instead. Those kinds of notes are virtually nonexistent in today’s market, but banks are still trying to sell off the inventory they built up in 2007.

The latest example is Symbion, an operator of short-stay surgical centers that Crestview Partners agreed to buy in April 2007 for $637 million. Debt-providing banks last month priced $135 million in senior PIK toggle loans at a huge discount of 75 cents on the dollar and a coupon of 11 percent. The lead underwriters are Merrill Lynch and Banc of America, and the proceeds will be used to pay off the remainder of a bridge loan the banks agreed to finance at the time the deal was announced. The banks were able to syndicate close to half of the bridge loan in June 2007, before the credit crisis began.

A deal facility like this would have been impossible to float a few months ago, and the PIK-toggle structure was made more palatable by the small size of the deal. Still, it’s moving now largely because a buying pool has emerged for heavily discounted debt. “If you want to come to market you have to pay the price,” one investor said. “They are giving a huge yield.”

Also helping the deal along is the company’s position in the health care sector. Comparable companies United Surgical Partners and Surgical Care Affiliates priced bonds last April and June respectively, and both issues have held up reasonably well.

The Caa1/CCC+ rated notes for Symbion will have a coupon of 11.75 percent as pay-in-kind, which is expected for the first coupon payment.

Two weeks ago, ratings agency Moody’s Investor Service changed its outlook on Symbion to negative, citing a reduction in the pace of expected improvement in the credit metrics of the company. Weak volume trends and out-of-network issues with payers in a number of the company’s key markets have prevented the company from meeting expected levels of revenue and EBITDA growth, according to Moody’s.

Moody’s said it expects the company to elect the PIK option on the new notes in order to fund investments in development and acquisitions in excess of operating cash flow. That translates into a limited pay-down of existing debt in the near-term, according to the ratings agency. Standard & Poor’s also put the credit on negative outlook.—Joy Ferguson covers leveraged loans for IFR, a sister publication of Thomson Reuters.