A Private Equity Firm Turns Unpaid Health Bills Into Big Payout

(Bloomberg) -- Private equity firm Pamplona Capital Management didn't wait long before it started pulling money out of Parexel International Corp., a company it bought in 2017, and it extracted the cash in an unusual way.

The investment firm set up a credit line at the drug testing company and secured it with the unpaid bills of Parexel's customers. The borrowing allowed Pamplona to cut the amount of equity it was risking in the buyout. But it hurt the investors that had already lent around $3 billion to the company, only to see it take on more debt.

The roughly $290 million that Pamplona took out of the company was allowed under the terms of Parexel's existing debt, people with knowledge of the matter said. The fact that lenders agreed to these terms in the first place underscores how torrid lending markets have been, and how little attention many money managers pay to the fine print of the transactions they are funding.

Two weeks ago Parexel said that it would enter a 30-day grace period for the release of its audited financial statements for the fiscal year that ended in June, according to Moody's Investors Service, giving lenders another surprise. The bond rating firm said it expects the accounting issue, which is related to the leveraged buyout, to be resolved within the grace period that expires in late November.

Pamplona took Parexel private in 2017 in a $4.5 billion deal. The private equity firm is one of many that have been taking advantage of frothy credit markets to lard their companies with more debt, and reduce the equity they have at risk. Companies have borrowed more than $30 billion in the junk bond and leveraged loan markets to pay dividends to their private equity owners so far in 2018, the highest level in four years, according to data from JPMorgan.

The drug testing company is still recovering from contract cancellations that have hurt its performance, S&P Global Ratings said. The bond grading firm said it expects Parexel to generate just $46 million of free cash flow in its 2019 fiscal year, which it considers a "transition year" for the company. In its fiscal 2017, Parexel's free cash flow was more than $230 million, according to data compiled by Bloomberg. Parexel named a new chief executive officer, Jamie Macdonald, in March, and new chief financial officer, Greg Rush, in August.

But during the company's conference call last month, Parexel said to investors that it exceeded its earnings and debt reduction goals for its 2018 fiscal year, the latest one, one of the people said. The new borrowing and the dividend distribution took place in the first quarter of the 2019 fiscal year, and amounted to 11 percent of the equity that Pamplona had put into the company, according to people with knowledge of the matter.

A spokesman for Pamplona, which was founded by Russian-born billionaire and former Alfa Bank CEO Alex Knaster, declined to comment, as did a spokeswoman for Waltham, Massachusetts-based Parexel.

Higher Priority

The new loans that Parexel took out have the highest priority among its debt: if the company falls into trouble, these lenders are the first to get paid, ahead of all its other creditors. That makes this form of borrowing, known as "receivables financing," relatively cheap, and companies often use it to fund their daily operations rather than to pay dividends to their owners.

Moody's in September revised its outlook on Parexel's B2 corporate rating to negative from stable, saying it expected the company's leverage to increase as Parexel borrowed money under the new facility. In August, S&P affirmed its B rating on the company, around the middle of the junk spectrum, and said it expects the company's debt levels to be around 7.5 or 8 times a measure of earnings in the future.

To contact the reporter on this story: Davide Scigliuzzo in New York at dscigliuzzo2@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins, Dawn McCarty

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