A spate of leveraged companies issuing Income Deposit Securities (IDS) has caused Standard & Poor's to raise concerns over the potential usage of the hybrid security, which is beginning to pick up in popularity. Last week, American Seafoods Group, Coinmach Corp. and United Agri Products were placed on credit watch with negative implications. In all cases the decision came after the companies announced plans to issue the securities.
IDS contain a share of common stock and a subordinated note clipped together as one unit that trades on a stock exchange. Owners of the unit receive dividends and interest payments that result in a yield, typically in excess of 10%. It can also offer mature, cash flow generating businesses a potential avenue to an IPO market that typically favors more growth-oriented companies. Private equity players are therefore able to benefit from the structure.
"There are several [IDS] transactions in the pipeline and our view in general is that the IDS securities exhibit an extremely aggressive financial policy," said S&P credit analyst David Kang. He noted that S&P has not issued a formal policy statement and an S&P official underlined that the rating agency looks at companies on a case-by-case basis, and that in some situations the IDS structure could be viewed as a positive if proceeds were used to pay down debt.
But Kang noted, "If you consider our methodology, we look at business risk profile. We also look at financial policy including cash flow and financial flexibility. In general, we see IDS as reflective of an aggressive financial policy and limiting financial flexibility. This stems from the high dividend payout rate and aggressive use of cash. As credit analysts, we prefer to see a company applying its cash flow to delever," he added. Coinmach is a GTCR Golder Rauner portfolio company. Bob Doyle, cfo of Coinmach, did not return calls. Brad Bodenman, cfo of American Seafoods, was traveling and was unable to return calls by press time and officials at United Agri Products did not return calls.