TransDigm Turns to Creditors Again for Billion-Dollar Payout

  • Junk-rated company would draw on term loan, balance-sheet cash
  • Special dividends also paid to stockholders in 2013, 2014

How much are investors willing to bend if you dangle a bit of yield in front of them? TransDigm Group Inc. is about to find out.

The junk-rated maker of aircraft parts is asking creditors if they would help fund a special payout for its shareholders of as much as $1.5 billion, according to a company statement. TransDigm, which earlier this year made its way into the S&P 500, is proposing to increase its term loan borrowings by $650 million and use balance-sheet cash to help fund the one-time dividend.

It’s not the first time TransDigm has asked debt holders to fund shareholders. In 2013, the company tapped bond and loan markets for more than $1 billion that was routed to equity investors through a $22-a-share dividend, and the company made a similar payment in 2014 at $25 a share. The board hasn’t committed to approving the new payout, which could total $1.1 billion to $1.5 billion, according to the statement. TransDigm doesn’t have a regular quarterly dividend.

“This continues along the lines of what the company has done in the past,” said Matthew Geudtner, an analyst at Bloomberg Intelligence. “The company’s leverage is elevated by design to generate big returns for its equity holders. They are still within the covenants of their credit agreement.”

Forecast Update

TransDigm also said it expects fiscal 2016 net sales to be at or slightly below the low end of its previous forecast, while Ebitda, the measure of adjusted earnings watched by debt investors, may be at or modestly above the midpoint of its prior estimate. TransDigm posted higher net income for each of the past three years, and each of the first three fiscal quarters of 2016.

Cleveland-based TransDigm already has more than $10 billion of debt and some of its lowest-ranking borrowings are rated as much as seven rungs below investment grade at CCC+ by S&P Global Ratings.

Shares of TransDigm slipped $6.73, or 2.3 percent, to $283.13 in New York. Its 6.375 percent notes coming due in 2026 dropped 0.8 cent to 103.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“TransDigm’s first priority for its ample free cash-flow generation remains investing in its existing businesses and pursuing accretive acquisitions followed by paying out special dividends,” Evan Mann, an analyst at debt-research firm Gimme Credit, said in a note. “Its third and least likely use is repaying debt.”

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