TLDR: With the European high yield primary market closed for the moment at least, we’ve been looking at what our Banking & Sponsor clients might get up to in the coming months.
Below we cover 9 key areas that have been at the forefront of our mind given the current market environment. We also provide links to 9fin tools & data that can help market participants navigate these volatile markets.
Consents, Exchanges & Amendments
Super Senior / Pari Liquidity Facilities (e.g. Pizza Express)
Pre-emptive Cash / Value Leakage
Unusual Covenant Packages (e.g. Vivion)
RCF Waivers
Debt Buybacks
364 Day / Short Tenor Facilities
Private Credit / Longer Term Refinancing (e.g. Ardonagh)
Bridge Selldowns / Synthetic Hedging
1. Consents, Exchanges & Amendments
Headline terms like coupon & maturities in nearly all high yield deals require at least 90% super majority approval to amend. However, most covenants are only subject to a 50% threshold for amendment - that means coercive exchanges remain a part of the Banker playbook. We haven’t seen it happen yet but there’s plenty to think about in this space.
Priming - New money either pari or super senior. Anti-layering covenants have been removed from lots of deals, basket sizes usually only 50% consent to change
Covenant stripping + aggressively timed consent fees to encourage exchanges
Collateral dilution via permitted investments to unrestricted subs, raise fresh debt on those assets
Typically as a credit deteriorates long only holders flip to specialised distressed funds as they may lack the experience, time, mandate or appetite to be around the table on an Ad Hoc restructuring committee. The breadth & speed of the Corona crash means that freshly ‘distressed’ credits are still largely held by performing funds. This presents an opportunity for banks or advisors to anchor new money deals / consents by rolling long-only funds into new transactions.
How 9fin can help?
- Our OM repository can help you quickly discover amendment thresholds
2. Super Senior / Pari Liquidity Facilities
Without amending existing documentation most deals have plenty of capacity for incremental secured pari debt & even super senior debt. Typically (but not always) super senior capacity comes via the Credit Facilities & Hedging baskets.
These may already be taken up by RCFs which cannot be reclassified, but to the extent these baskets are based on growers (i.e. 100% EBITDA) there is likely to be excess capacity that can be used today. LTM tests are backward looking so Covid-19 impacts won’t yet be in EBITDA numbers for grower calculations.
Companies with asset based growers have an extra advantage that total assets will remain a higher number for longer than EBITDA. Note asset based grower basket calculations usually include cash - so proceeds from any recent RCF drawdown will increase debt / RP capacity.
We’ve already seen Pizza Express (super senior via HPS) and Selecta (super senior via KKR) put in place additional debt to ease liquidity constraints.
How 9fin can help?
- Our Covenant Explorer allows you to build side by sides of key baskets and navigate quickly through an OM (e.g. retail names here).
3. Pre-emptive Cash / Value Leakage
There are large carve outs for restricted payments & permitted investments in most high yield deals. Through these baskets, sponsors can take assets out of the restricted group to a) gain negotiating leverage in future restructuring discussions or b) secure additional debt facilities secured against those assets.
Deals that have “Significant Subsidiary” language in their negative pledge definition (usually 10% assets), also have flexibility to raise debt secured against those assets. For example see Casino’s secured deal last year.
4. Unusual Covenant Packages
We’d also be on the lookout for deals with unusual or complex covenant packages that the market may have overlooked. For example, Vivion’s OpCo PropCo deal is based on English law and unusually for a HY deal has maintenance covenants.
However... the structure also has
1) a huge amount of capacity for value leakage based on an unencumbered assets test
2) an ownership structure with significant conflicts of interest
3) a reliance on cashflow from Hotel OpCos whose lease payments were structured at the top of the market to consume essentially all of the Hotel’s historical EBITDA (payments were also set assuming improving margins!!)
How can 9fin help?
- You can find our Legals QuickTakes on each Company’s profile page or browse a complete list here. Vivion’s original deal QuickTake is here, an excerpt below.
- “Operating Lease cashflow stream is dependent on Hotel OpCo performance. Performance of the hotel portfolio is not readily apparent from the documentation.
- Moreover operating leases for hotels moved out of the group as part of the Transactions were entered into "around or above the historical annual EBITDA for the relevant hotels and were negotiated on the assumption that the performance and profitability of the relevant hotel operations would improve over time".
- This suggests limited room for deterioration in Hotel performance before Operating Lease payments may come under stress. Conflict of interest in a distressed scenario between Principal Shareholder (controls Hotel OpCos) and Noteholders”
5. RCF Waivers
RCF covenants used to be a running joke in the market, but with pre-emptive drawdowns across the board even springing covenants with super senior leverage tests may soon be triggered. These can be cured or waived by lenders who may be sympathetic given the market backdrop.
However, many investment banks sell or shift their RCF exposure. This can be via subpart, risk allocation, back-to-backs or an outright sale. Hedge Funds or Asset Managers with flexible mandates often don’t mind these undrawn facilities as they receive commitment fees and do not have to hold any capital against the exposure (unlike banks). When facilities are undrawn this can generate very attractive returns (30-35% margin as a commitment fee / 0 committed capital). However, that could be a painful mistake as these facilities now get drawn, right at the moment when funds are experiencing or anticipating outflows. This problem is amplified in leveraged vehicles.
The default assumption around RCF covenant breaches has been that waivers will be granted by sympathetic banks. We’d challenge this assumption where a distressed or loan-to-own fund has managed to get a sizeable stake in an Issuer’s RCF.
This could also develop into pretty serious client ‘relationship issues’ for banks. Often RCF selldowns are structured as ‘silent sales’ where banks remain as the lender of record but are no longer beneficial owners. Imagine being a CFO calling your friendly relationship bank with a drawdown or waiver request only to get a reply from Apollo….
How 9fin can help?
- Our full text search lets you find RCF covenants in seconds, an example search here.
- We also published articles on liquidity metrics & covenant testing levels for Issues who have recently drawn down here.
6. Debt Buybacks
Where sponsors a) have capital available and b) are choosing to support a portfolio company … bond buybacks can be very attractive. These can be completed silently in the secondary market via a mandated bank or through a more open tender offer process.
For corporate clients without liquidity concerns, this can also offer an attractive return on capital and a reduction in cash interest expense. However, as flagged on our Twitter feed last week, some corporates fear being assigned a ‘selective default’ rating by the agencies should they buy back bonds at deeply discounted levels.
How 9fin can help?
- See companies with bonds sub-80 who have significant liquidity to fund buybacks here.
- Note we’re still onboarding liquidity metrics for all Issuers, so you can also use total cash in EUR to spot buyback opportunities more broadly.
- Find companies who have previously bought back bonds using our document search here
7. 364 Day / Short Tenor Facilities
Several issuers have upcoming refinancing needs. This includes 2020 maturities for large Double BB names, or companies who are at risk of going ‘current’ on 2021 maturities. We know several banks who have been approached to arrange short term facilities to bridge these near term maturities.
At the moment, we’re highly skeptical whether bank underwriting committees have an appetite to go on risk for these trades. Any who are willing to put their balance sheet to work should expect to be rewarded with a significant gain in market share & deal fees for future transactions. Sponsors & large corporates have a funny way of forgetting that you were there for them in the tough times after the market has turned, so it may be worth getting a firm commitment / engagement letter for the next bond transaction.
LevFin bankers can also help Issuers sound out more opportunistic capital from Hedge Funds willing to take 1-2 year risk at 10%+ cost of debt. Size (market capacity) is a significant constraint for these types of trade, although creative structuring can make them attractive. Think bridge style step ups / PIK interest, or equity kickers (*ahem* Aston Martin).
How 9fin can help?
- 2020 maturities for large issuers here
- Names at risk of going current with 2021 maturities here
8. Private Credit / Longer Term Refinancings
Private credit funds are still open for business, many have significant capital to deploy and are solving for a hurdle rate of ~8-10% rather than public market levels. For Issuers comfortable with this cost of debt (or who have no choice) this is an option. For example DebtWire recently reported that Ardonagh was exploring a monster £1.65bn Unitranche refinancing.
For underwritten bridges which are currently underwater we would also expect to see ‘flex-to-private-credit’ being used where it is present in commitment papers or can be negotiated with a Sponsor.
9. Bridge Selldowns / Synthetic Hedging
This should take place well away from LevFin desks, either via internal risk teams or at CIO level (think London Whale…). By now most banks are likely to have evaluated their outstanding bridge books. Single name HY risk is hard to hedge, for liquidity reasons (e.g. Stonegate) and in some instances due to the lack of any existing CDS (e.g. new LBOs like ThyssenKrupp’s lifts division). Legally hedging bridge risk is also a minefield as hedging needs to be executed by teams who are chinese walled from transaction or issuer level information like forward looking projections.
One way around these restrictions is via large notional hedges based on a CDS index. Bill Ackman proved that last week with a 100x return on a $27m trade. The full letter from Pershing Square explaining the trade is a great read, see it here.
Finally, outright Bridge selldowns in advance of a bond takeout are a possibility. These are quite common in the US market but relatively unusual for European High Yield. In these economic conditions, we doubt many (if any) funds have appetite to take the other side of this bank de-risking trade. Some capital markets bankers are also of the view that European primary can still return in the near future (see Yum in the US). To their mind that means a selldown today through deal fees isn’t justified. Time will tell...
