In just three years, H.I.G. Capital has recouped more than its investment in Cornerstone Chemical Co.
Cornerstone is issuing $75 million in PIK toggle notes that will be used to pay a dividend to its shareholders, according to Moody’s Investors Service. The debt-funded return of capital will boost Cornerstone’s adjusted financial leverage to above 5x, Moody’s said.
News of the new debt caused Moody’s to change Cornerstone’s outlook to negative. Waggaman, Louisiana-based Cornerstone produces chemicals such as acrylonitrile, melamine and sulfuric acid. The company generated about $600 million revenue in 2013, Moody’s said.
“Taking a debt-funded dividend while the company is still working through recent operational issues and long before the company starts receiving the benefit of low-cost ammonia from a new project stretches the boundaries of the B2 CFR and could lead to a rating downgrade if operating performance does not improve in the near-term,” said Ben Nelson, assistant VP and lead analyst in Moody’s corporate finance group, in a March 12 note.
The first dividend came last year. Cornerstone issued $220 million in loans in March 2013 that it used to refinance existing debt, fund a dividend to sponsors and pay fees and expenses, Moody’s said. That dividend paid back all the cash equity H.I.G. used to fund its buy of Cornerstone in 2011, said Moody’s, which called the distribution “aggressive.”
H.I.G. acquired the building-block chemical business of Cytec Industries in February 2011 for $180 million. This included $165 million cash and a $15 million note, according to a statement from that time. H.I.G. then renamed the unit Cornerstone Chemical.
Cornerstone’s two dividends are a “quick return of capital,” Nelson told peHUB. “Market conditions are favorable for this type of issuance.”
Fast dividends aren’t new, he said. Nelson referred to Osmose Holdings, which paid out two dividends in 11 months. The distributions returned more than half of Oaktree Capital‘s investment, peHUB reported last year.
Miami-based H.I.G. invests in small and medium-sized companies. In February, the PE firm closed its H.I.G. Middle Market LBO Fund II at its $1.75 billion hard cap. H.I.G. completed its buy of certain AED Group assets earlier this week.
H.I.G. and Cornerstone could not be reached for comment.
Photo courtesy of Cornerstone