Axalta sees lower 2017 interest expense after transactions, expects to hit 2.5-3.0 times leverage

By Paul Deckelman

New York, Dec. 15 – Axalta Coating Systems Ltd. anticipates that its interest costs for 2017 will fall to around $150 million as a result of a series of capital market transactions that the company engaged in this year, and expect to bring its leverage measure down as well.

Robert W. Bryant, executive vice president and chief financial officer of the Philadelphia-based provider of paints and other coatings for the automotive market and other industrial applications, said on the company’s 2017 outlook conference call with analysts on Thursday that “given our series of refinancing transactions completed since August, we highlight that our interest expense should total approximately $150 million in 2017, including around a $35 million reduction from the run-rate of our expense prior to our refinancing and term loan pre-payments made in October.”

Wheeling and dealing

Axalta sold $875 million equivalent of eight-year senior notes in two tranches in early August following a roadshow to market that paper to high yield investors.

The deal, which priced on Aug. 2, included $500 million of 4 7/8% notes, which priced at 99.591 to yield 4.938%, as well as €335 million of 4¼% notes, which priced at par to yield 4¼%.

The company planned to use the new-deal proceeds to refinance its existing 7 3/8% senior notes due 2021 and for general corporate purposes.

It came back to the junk bond market the following month with a €450 million issue of senior notes due Jan. 15, 2025, which priced at par to yield 3¾% in a quick-to-market transaction on Sept. 13.

Proceeds went to redeem all of its outstanding 5¾% euro-denominated senior secured notes due 2021 and to prepay a portion of its euro-denominated term loan B.

In mid-October, it voluntarily prepaid $150 million of outstanding term loans under its senior secured credit facility.

The company visited the bank-loan market earlier this month with a new $1.545 billion U.S. term loan B due February 2023, which priced at Libor plus 250 basis points with a 0.75% Libor floor and was issued at par. The debt has 101 soft call protection for six months.

The company also lined up a €400 million term loan B due February 2023, priced at Euribor plus 225 bps with a 0.75% Euribor floor and issued at par. This tranche has 101 soft call protection for six months as well.

The dollar-denominated loan had been downsized from an originally planned $1.775 billion, with the issue price tightened from talk of 99.5 to 99.75; the euro-denominated loan was accordingly upsized from €187 million, and pricing on that piece was trimmed from Euribor plus 250 bps and the issue price was changed from talk of 99.5 to 99.75.

Proceeds from the loan deal, along with cash on hand, will be used to refinance $1.775 billion of term loans due 2020 priced at Libor plus 275 bps with a 1% Libor floor and €187 million of term loans due 2020 priced at Euribor plus 300 bps with a 1% Euribor floor, and to pay related transaction fees and expenses.

Free cash flow, leverage targets

During the conference call, Bryant also said that the company “remains focused on generating strong free cash flow,” which is expected to increase to a $440 million to $480 million range in 2017 from around $360 million to $380 million this year, due to EBITDA growth, lower interest expense and modest year-over-year working capital improvement.

He said Axalta “expects to hit our net leverage of 2.5 [times] to 3 times in the relative near term.”

He noted that, that level of net debt as a multiple of EBITDA “does not assume any meaningful impacts of M&A on our cash position. Achieving this leverage goal would allow us to reset our allocation priorities, and we continue to expect a total shareholder return model to form the basis of any allocation over time.”

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