Another IPO Heyday?

Allison Transmission is the latest company looking to tap the equity market to repay debt. The Indianapolis manufacturer of transmissions and other auto parts is planning to raise around $750 million in an initial public offering. Despite the perception that an IPO represents a healthy payday for its PE backers, the Allison flotation reflects the more common trend today in which sponsor-backed companies channel whatever proceeds they receive from the IPO to pay down debt.

"Overall, companies are in the mode of deleveraging," said Jeff Peskind, chief investment officer with Phoenix Investment Adviser. "Even though they can and they have been refinancing debt with longer-dated maturities, management teams would rather have less debt on the company than they did pre-crisis. Their thinking is that less leverage is better."

Peskind added that private-equity owners of junk-rated companies also face pressure from investors to return money.

Allison, a former General Motors division, went private in 2007 in a $5.575 billion buyout by the Carlyle Group and Onex. The firms contributed a combined $1.5 billion in equity to the deal and financed the rest with debt, made up of a term loan B, 11% senior facility, PIK toggle notes and a revolver. A total of $3.67 billion of the debt remains today.

Allison's planned offering follows that of its former parent, GM, which raised $23 billion last year. And observers wouldn't be surprised if parts manufacturers Delphi and IAC follow suit.

"The auto-parts sector took advantage of [an open equity market] in latter 2009, when the sector began its recovery," said Timothy Harrod, a vice president and senior analyst with Moody's Investors Service. Other companies in the sector that have completed successful IPOs include Dana Holdings and TRW Automotive.

To be sure, the highlight in the IPO market, year to date, was the March flotation of HCA, which returned to the public market after a roughly five-year stay in private equity hands. Its sponsors, Kohlberg Kravis Roberts, Bain Capital and Merrill Lynch Global Private Equity did not recoup any of their investment in through equity offering, which was used to repay debt.

While it won't stop the sponsors from cashing in at a later date, marketwatchers will usually scrutinize an IPO in which the proceeds don't go back to the business or trim debt.

That's not to say sponsors aren't taking chips off the table; there just isn't the immediate gratification some might prefer. Amid the flurry of IPOs, March also saw Italian restaurant chain Bravo Brio and healthcare marketing company Accretive Health Solutions -- both private equity backed -- file for secondary offerings. Bravo Brio is looking to raise around $80 million, while Accretive Health is aiming for around $151 million.

But the story remains the inflow of companies that hope to enter the market while the window remains open and trim their leverage as much as possible.

GNC, in the last week of March, raised $360 million in an IPO, while Penthouse publisher FriendFinder Networks, also in March, filed for its own IPO, following previous efforts to do so last year. Heat tracing equipment maker Thermon also filed to go public in February, less than a year after Code Hennessy & Simmons acquired the company.

"This deleveraging theme will continue," said Peskind. "Companies that lived through the '08 crisis and almost went bankrupt will continue to issue equity to pay down debt and de-risk their balance sheets."