The McGraw-Hill Cos. education unit bought by Apollo Global Management LLC (APO:US) last year borrowed $400 million with one of the riskiest types of junk bonds to pay a dividend to its new owners.
McGraw-Hill Education sold the five-year, 8.5 percent notes, issued through two parent entities, with a payment-in-kind option that allows the company to pay interest with additional debt, according to data compiled by Bloomberg. The bonds, sold at a discount of 99 cents on the dollar, were rated seven levels below investment-grade by Moody’s Investors Service.
Companies are increasingly turning to payment-in-kind, or PIK, bonds to fund payouts to owners as investors seeking alternatives to record-low yields delve into riskier assets. Before the sale today, companies had issued $4.2 billion in 13 PIK deals to finance dividends this year, compared with $1.5 billion in 11 offerings during the same period in 2013, according to data compiled by S&P Capital IQ LCD.
The securities will increase the company’s debt to earnings before interest, taxes, depreciation and amortization to 5.4 times from 4.4 times last year, according to a report from Moody’s analysts led by Carl Salas. The ratings company ranked the notes Caa1.
Leon Black’s Apollo bought McGraw-Hill Education in March 2013 for $2.4 billion in cash. The New York-based company is performing better than expected with revenue of $1.3 billion, the Moody’s report said.
High-yield, high-risk, debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.
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