Michael Baker PIK a quick dividend for DC Capital

The deal is another example of how the red-hot bond market is enabling private equity companies to extract value from portfolio companies at an accelerated pace—and doing so at pretty attractive rates at the same time, sister publication International Financing Review reported. The five-year non-call two trade priced at 99, offering a cash coupon of 8.875 percent, or 9.625 if it exercises the pay-in-kind option.

One source close to the deal said that was a premium of around 300 basis points over Michael Baker’s outstanding 8.25% October 2018 bond, which trades at a high cash price of 108 and is yielding around 5.875 percent.

Still that was less than the average 330bp premium for PIK deals, based on the banker’s calculations, and well inside the 375bp offered on BlueLine’s PIK toggle a couple of months ago. The stunning BlueLine deal allowed sponsor owner Platinum Equity to take out all of its equity just weeks after its acquisition of the Volvo subsidiary.

It is still fairly rare for a holdco PIK to finance a dividend within a year of a deal bring struck. The Michael Baker trade speaks volumes about risk appetite in the market, as investors had little to go on in judging how a company has performed under its new owners.

“This is an interesting story and more than just the story of the sponsor taking out a big dividend,” said Moody’s senior analyst Bruce Herskovics. “Although backlog has notably risen, there is a limited track record of the combined entity, and visibility into the company’s operating margins is clouded by a number of one-time costs related to business combination and operational restructuring activity.”

The source close to the deal said the company had performed very well with contracts with federal and state departments.

So far this year, there have been eight PIKs issued for a combined $2.86 billion, according to IFR data.

Michael Baker Corp entered into a definitive merger agreement last year to be acquired by Integrated Mission Solutions, an affiliate of DC Capital Partners. The deal was completed in October.

Moody’s changed the outlook on the company to negative from stable to reflect the increase in leverage, lower near-term cash flow, and a less robust liquidity profile for 2014 than was anticipated at the time. “A large, debt-funded dividend less than six months after the merger exposes the company to risk of a ratings downgrade,” Herskovics said. “Pro forma for the transaction, debt to EBITDA on a Moody’s adjusted basis would be close to 6x.”

The agency assigned a Caa1 rating to the bond.