europe accepts holdco Dividends

German chemicals company Cognis became the second European issuer to tap the euro market to allow private equity sponsors to funnel back a portion of their debt through a discount note, reducing pressure to exit the business via the equity markets.

Permira, Goldman Sachs and Schroder Ventures bought Cognis from Henkel in 2001 for €2.5bn. Goldman Sachs and Deutsche Bank led the latest deal.

The new €530m (increased from €500m), 10-year floating-rate senior PIK notes priced at a discount at 99% with a coupon of 900bp over six-month Euribor, the tight end of guidance of 900bp-925bp. Despite a handful of dividend recaps, there has only been one other holdco dividend deal for an existing European issuer.

With the amount of money chasing a limited supply of high-yielding assets, bankers suggest that there are at least five or six possible discount dividend deals.

Bankers working on Cognis said the deal was driven by reverse enquiry, and that the order book was well on its way to being filled when the transaction was officially announced. Several large accounts were reported to have taken tickets of over €50m each, said one hedge fund manager who took part in the deal.

But some banks claimed to have refused the mandate because they were not prepared to backstop the deal at the company’s request. Some investors also expressed surprise at the size of the dividend payment, as the sponsors had taken a €320m chunk of equity out of the company last May.

The new bond is callable after six months, and then in whole or in part at 101 between six and 18 months from the issue date. The note also carries a 200bp step-up for any interest period after December 31, 2007, if after this date the

consolidated leverage ratio of Cognis is equal to or greater than 3.5 to 1.