McGraw Hill had turned to an exotic structure for the sale of $250m in bonds © Alamy
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McGraw Hill Education, the private equity owned textbook publisher, was forced to scrap a planned bond sale on Friday with even the lure of a double-digit interest coupon failing to attract enough investor support.
The company had turned to an exotic structure for the sale of $250m in bonds, using pay-in-kind toggle notes, as it sought to refinance some of its obligations coming due in 2019.
In spite of offering buyers a fixed return of 10 per cent, investors remained wary of the terms for the paper according to several people familiar with the deal.
A PIK toggle enables a company to pay interest obligations with either cash or more debt. While that gives the issuer added flexibility should its cash levels fall short or it run into financial difficulty, it also increases the risks for investors in the bonds.
One investor following the deal said it was “clearly seeming to struggle”, adding “I wouldn’t want that bond structure with Apollo”. Apollo Global Management, known as among the more aggressive private equity shops by bond investors, purchased McGraw Hill Education in 2013 for $2.4bn. Since at least 2015, Apollo has sought to float the company’s stock, filing paperwork with US securities regulators for an initial public offering.
However, it has yet to complete a deal. In April, a filing with the Securities and Exchange Commission showed sales for the company fell 4 per cent in 2016 from the year before to $1.8bn. McGraw Hill Education’s net loss in the period narrowed to $116m from $171m in 2015. It blamed the sales decline at the time on “lower print revenues” in light of “the ongoing digital transition in the marketplace.”
McGraw Hill Education declined to comment.
On Thursday, when the deal was supposed to be completed, bankers increased the coupon on the deal to 10 per cent, offered to sell the bonds at a discount of 99 cents on the dollar and extended investors additional protection in the form of a longer non-call period. Together, that increased the yield on the deal to 10.375 per cent, the people added.
Popular before the financial crisis, PIKs had seen something of a resurgence of late, with sales completed by healthcare technology company Multiplan and Sotera Health, a laboratory and healthcare service provider, last month. The planned sale from McGraw Hill Education would have lifted overall PIK issuance in the US this year to roughly $3bn, about $400m below last year’s levels, according to Dealogic.
The deal from McGraw Hill Education, coming less than two months after its chief executive announced his departure from the company, faced investor pushback from the start. Bankers, led by Credit Suisse and Jefferies, had initially marketed the bond with a yield of around 9 to 9.25 per cent, before raising that figure to around 9.5 per cent.