Iron Mountain Calms Bondholders on Dividend: Corporate Finance

Iron Mountain Inc., the document-storage company that was pressured by Elliott Management Corp. to change its strategy, is persuading the bond market it can reward shareholders without harming its creditworthiness.

The company’s $300 million of 8 percent notes due June 2020 rose for the first time in six days yesterday, gaining 0.25 cent to 103.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its 8.375 percent debt due August 2021 rose today for a second day, Trace data show.

Iron Mountain Chief Executive Officer Richard Reese assured debt investors yesterday the Boston-based company’s leverage would face no more than a “slight increase” as it returns $2.2 billion to shareholders through 2013. Last month, hedge fund Elliott Management called for a review of Iron Mountain, citing a loss of shareholder value from parts of its international and digital businesses.

“The sources of the funds are coming, by and large, from operations, free cash flow, as well as from a slight increase in our leverage,” Reese, 65, who led the company between 1981 and 2008 and resumed that role last week, said in a conference call. “I want to be real clear to the debt markets who might be listening, or hopefully are listening, we’re talking about going from a little under 3 times leveraged to 3.5.”

12-Month Return

The return to shareholders in the next 12 months will be $1.2 billion, including “potential one-time dividends,” in addition to quarterly distributions and share buybacks, Iron Mountain said in a statement on April 19.

The 8 percent notes fell to 103.25 cents on the dollar that day to yield 7.46 percent, Trace data show. The debt traded at 107.6 cents with a 6.92 percent yield on March 2, Trace data show.

The average B rated security yields 7.38 percent, according to Bank of America Merrill Lynch index data. The senior subordinated notes from Iron Mountain are graded B1 by Moody’s Investors Service and B+ by Standard & Poor’s, according to data compiled by Bloomberg.

Investors were concerned the company might take on more debt to make payouts to fend off pressure from shareholders, said Sabur Moini, a money manager who oversees more than $2 billion of high-yield debt at Los Angeles-based Payden & Rygel, including bonds from Iron Mountain.

‘Not Bondholder-Friendly’

“Whenever news like this comes out, it’s bad for the bonds because the expectation is that the company to save itself will have to do something that’s not bondholder-friendly,” Moini said. “It probably makes sense to take in more information and not be one of the first to sell at a low print,” he said on April 19.

Iron Mountain initially adopted a so-called poison-pill provision, meant to keep dissident investors from gaining control of it. Last week, Bob Brennan resigned as CEO, and the company said in an April 19 statement it plans to sell parts of its digital unit and return cash to shareholders.

Iron Mountain also said it’s setting up a committee to explore conversion into a real estate investment trust as part of an agreement with Elliott Management. REITs must pass on at least 90 percent of their annual taxable profit to shareholders through dividends.

New York-based Elliott Management, run by Paul Singer, has said it owns “slightly under” 5 percent of Iron Mountain’s stock.

As part of its agreement with Elliott Management, Iron Mountain also agreed to nominate Allan Loren, one of the company’s four candidates, to its board at the 2011 annual meeting, scheduled for June 10. Elliott Management agreed to withdraw its other nominees at the event, Iron Mountain said.

Underground Facility

Iron Mountain, founded in an underground facility near Hudson, New York, in 1951, stores and maintains materials for clients, including records, electronic files, medical data and e-mail, according to its most recent annual report. It works with more than 150,000 corporations in North America, Europe, Latin America and Asia Pacific.

The company, which had $2.9 billion of long-term debt as of Dec. 31, went public in 1996 and joined the S&P 500 Index in January 2009, according to the filing.

Iron Mountain’s $548 million of 8.375 percent bonds maturing in August 2021 rose yesterday after falling since April 14, Trace data show. The debt climbed 1.5 cents to 106 cents on the dollar to yield 7.5 percent, the data show.

The bonds rose again today, gaining 0.5 cent to 106.5 cents to yield 7.46 percent as of 9:37 a.m., the data show.

Before yesterday’s call, S&P, which assigns Iron Mountain a BB- grade, changed its outlook on the company to “negative” from “stable,” according to an April 19 note.

‘Financial Risk’

“We expect the company will have to raise new debt and draw under its revolving credit facility to finance the entire planned $2.2 billion,” S&P analysts Tulip Lim and Andy Liu wrote in the note. “The transaction will raise financial risk amid uncertainty as to financing terms.”

The payouts could increase the company’s debt to earnings before interest, taxes, depreciation and amortization to more than five times from the “low” four times area now, the analysts wrote. A debt to EBITDA ratio above 5.5 times would spur a downgrade, they wrote.

“More leverage makes bondholders increasingly uncomfortable,” said Andrew Wittmann, an analyst at Robert W. Baird & Co. in Milwaukee.

The company’s target leverage of 3.5 times looks “about right,” said Wittman, who has a “neutral” rating on the stock. “Shareholders feel very comfortable there, and I feel like bondholders should feel pretty comfortable as well,” he said.

Credit Swaps

Credit-default swaps on Iron Mountain’s subordinated bonds fell after soaring on April 19 to the highest since September, according to data provider CMA. The contracts, which typically rise as investor confidence worsens and fall as it improves, fell 7 basis points to 418.9 yesterday, CMA data show.

Default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

“Some could even argue we’re under-levered,” Reese said on the conference call. “We think we’re appropriately levered at this space, given where the business is and given the amount of capital we’re talking about and we think this is the right thing to do. But this is not coming from a big leverage up for the business at this stage.”

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