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Why Compass Diversified Holdings Stock Dropped 11% Today

By Rich Smith - Updated May 5, 2020 at 5:09PM

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In an effort to rein in debt, Compass issued stock...and took on more debt.

What happened

Shares of Compass Diversified Holdings (CODI 2.28%) plummeted today -- down 10.9% as of 1:05 p.m. EDT -- after the private equity firm announced a series of fundraising measures that apparently spooked investors.

So what

Compass Diversified announced yesterday that it is issuing and selling 5 million shares at $17.60 apiece, raising at least $88 million in gross proceeds, and potentially a bit more. As is usual in such offerings, Compass is giving its offering's underwriters the opportunity to buy an additional 750,000 shares. The total number of shares potentially being floated, therefore, comes to 5.75 million -- enough to dilute existing shareholders out of about 9% of their stake in the company.

Separately, this morning Compass announced plans to offer $200 million worth of "senior unsecured notes due 2026" (that is, Compass is taking on more debt).

Pencil erasing the word Debt

Image source: Getty Images.

Now what

Or at least, this is how investors seem to be viewing the news. Compass says that money raised from yesterday's stock offering will be used "to repay a portion of the outstanding balance of the Company's revolving credit facility," while money raised from today's notes offering will be used largely to repay whatever remains of said credit facility.

The net effect of all this should still be a substantial reduction in Compass's $595 million debt load (and in interest payments on that debt), accompanied by a significant amount of stock dilution. And the result of that should be more profits for Compass with which to fund its dividend, now providing a generous dividend yield of 7.2%.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Compass Diversified Holdings LLC Stock Quote
Compass Diversified Holdings LLC
$24.65 (2.28%) $0.55

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