McGraw-Hill Education Sells Pay-In-Kind Debt for Dividend

The McGraw-Hill Cos. education unit bought by Apollo Global Management LLC (APO) 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.

To contact the reporter on this story: Adam Janofsky in New York at

To contact the editors responsible for this story: Shannon D. Harrington at John Parry

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.