Loxam
Covenant Analysis: Loxam Unable to Incur Priority Ratio Debt Given CPDLR Above 4x; Priority Ratio Debt Basket Also Limits Secured Ratio Debt; 2023 Notes €1B Credit Facility Basket Lower Compared to Other Issuances
Fri 11/22/2019 10:04 AM
Relevant Documents:
Excel File: Loxam Covenant Calculator
SSN 3.5% 2022, 4.25% 2024, Subs 2025 OM
SSN 2.875% 2026, Subs 2027 OM
SSN 3.5% 2023 OM
SSN 3.25 2025, 3.75% 2026, Subs 2027 OM
Loxam has been on a spree of acquisitions which has raised questions around the European equipment rental company's debt capacity. Reorg Debt Explained debt capacity analysis suggests Loxam cannot issue additional priority ratio debt as the issuer exceeds the 4.0x limit imposed by the subordinated notes. Despite meeting the 3.85x tightest ratio basket related to the issuance of secured debt Loxam may not be able to take on more secured ratio debt due to the limitation on priority debt. Additional secured debt could potentially be issued under other baskets such as the €1.4 billion credit facility basket which had headroom of €175 million as per the bonds issued in 2019. The smaller €1.0 billion credit facility basket under the 2023 senior secured notes raises questions around the headroom under these bonds which we discuss below.
Below our proprietary debt capacity summary reflecting the tightest covenants:
Prior to this acquisition, Loxam’s UK subsidiary Nationwide platforms completed the acquisition of UK Platforms Limited, UKP, from HSS Hire Group in January. In 2018, the company acquired Italian powered access rental company NoVe from Haulotte Group SA. Loxam entered the Italian market with the acquisition of Nacanco in 2017. The company also acquired Swan Plant Hire, an Irish equipment rental company, and the Danish equipment rental operations of Cramo Plc in 2017.
Reorg looked at Loxam’s debt capacity under each of the company’s bonds using pro-forma Ramirent acquisition figures as of March 31. The latest second-quarter results did not have the Ramirent acquisition included thus were not used.
Loxam’s main debt incurrence baskets are the credit facility basket and ratio basket. Interestingly, Loxam’s 2023 notes have a €1 billion credit facilities basket, €400 million below the €1.4 billion credit facilities basket of the other outstanding bonds. Based on the language in the offering memorandums for the 2019 issuances, utilization of the credit facilities basket stood at €1.225 billion leaving €175 million of headroom. The latest OM states that the RCF (€75 million), the 2022 Senior Secured Notes (€300 million), the 2023 Senior Secured Notes (€250 million), the 2024 Senior Secured Notes (€300 million), and the April 2026 Senior Secured Notes (€300 million) and any permitted refinancing indebtedness thereof that constitutes senior secured debt comes under the credit facility basket and may not be reclassified. In continuum the same should apply to 2023 SSN which has a lower credit facility basket of €1 billion, in that case, the €1.225 billion utilization under the latest bonds could be in breach of its permission under the 2023 indenture.
A source close to the situation said that there was no breach as under the 2023 SSN indenture. This is because since “only outstanding RCF debt, the 2023 SSNs, the old 2021 SSNs and any permitted refinancing Indebtedness thereof that constitutes senior secured debt must be incurred under the credit facilities basket and may not be reclassified”. The source added that Loxam's senior secured note issuances subsequent to the 2023 issuance, except for the portion of the April 2026 SSNs that were used to redeem the 2021 SSNs earlier this year, do not fall into any of those definitions and therefore may be freely reclassified as necessary under the terms of the 2023 SSN indenture.
This implies that certain of the debt stated under the 2019 issuances as not capable of being reclassified, would have been reclassified under the 2023 SSN in order to comply with basket cap under the 2023 SSN. As the credit facility basket is a single basket shared across all issuer’s notes (except for the increased capacity under notes issued after the 2023 SSN) then a reclassification of any of such debt under the 2023 SSN should also apply to the other existing notes. Such reclassification would not appear to be permitted under the 2019 issuances.
Reorg’s analysis of the issuer’s bond documentation highlights that with a consolidated coverage ratio of 4.78x as of March based on pro-forma EBITDA, Loxam has sufficient capacity to issue additional ratio debt as the company exceeded the 2.0x FCCR test. However, the company cannot issue additional priority debt (as it is so capped under the terms of its existing subordinated notes indentures) as the consolidated priority debt leverage ratio and the net consolidated priority debt leverage ratio exceeded the 4.0x limit imposed by the subordinated notes.
In the issuer’s bond documentation priority debt is defined as a secured debt plus both secured and unsecured debt of non-guarantor subsidiaries. The calculation of priority debt is shown below:
Although the company met the tightest ratio basket related to the issuance of secured debt, which is 3.85x consolidated senior secured leverage ratio under the SSN 2023 notes, with a margin of 0.43x, the company may not be able to take on more secured debt under the ratio baskets due to the lack of capacity to incur priority ratio debt under the subordinated notes.
Apart from the ratio baskets and the credit facility basket the company can also issue debt under general debt and purchase money and capital lease obligation baskets. General indebtedness is limited €153.7 and purchase money and capital lease obligations are limited to €128.1 million under all of the notes, with both baskets capable of being secured on the collateral or non-collateral assets, except that the general indebtedness basket can only be secured on non-collateral assets to the extent of available capacity under the general Permitted Liens basket of greater of €35 million and 2% of total assets. The company also has a €75 million receivables financing basket and a €5 million basket for management advances, among other baskets shown above.
The capital structure Pro-forma for the Ramirent acquisition is shown below:
Debt capacity baskets calculated as of Pro-forma March 31 under each of the notes are shown below:
-- Noor U Sehur and Temitope Adesanya
Excel File: Loxam Covenant Calculator
SSN 3.5% 2022, 4.25% 2024, Subs 2025 OM
SSN 2.875% 2026, Subs 2027 OM
SSN 3.5% 2023 OM
SSN 3.25 2025, 3.75% 2026, Subs 2027 OM
Loxam has been on a spree of acquisitions which has raised questions around the European equipment rental company's debt capacity. Reorg Debt Explained debt capacity analysis suggests Loxam cannot issue additional priority ratio debt as the issuer exceeds the 4.0x limit imposed by the subordinated notes. Despite meeting the 3.85x tightest ratio basket related to the issuance of secured debt Loxam may not be able to take on more secured ratio debt due to the limitation on priority debt. Additional secured debt could potentially be issued under other baskets such as the €1.4 billion credit facility basket which had headroom of €175 million as per the bonds issued in 2019. The smaller €1.0 billion credit facility basket under the 2023 senior secured notes raises questions around the headroom under these bonds which we discuss below.
Below our proprietary debt capacity summary reflecting the tightest covenants:
(Click HERE to enlarge)
In July Loxam completed the acquisition of Ramirent through a cash tender offer which valued the company at €970 million. To fund the acquisition, Loxam raised €1.15 billion senior secured notes and €250 million senior subordinated notes. Pro-forma for the issuance of the new notes and the Ramirent acquisition net leverage rose to 5.3x as of March 31.Prior to this acquisition, Loxam’s UK subsidiary Nationwide platforms completed the acquisition of UK Platforms Limited, UKP, from HSS Hire Group in January. In 2018, the company acquired Italian powered access rental company NoVe from Haulotte Group SA. Loxam entered the Italian market with the acquisition of Nacanco in 2017. The company also acquired Swan Plant Hire, an Irish equipment rental company, and the Danish equipment rental operations of Cramo Plc in 2017.
Reorg looked at Loxam’s debt capacity under each of the company’s bonds using pro-forma Ramirent acquisition figures as of March 31. The latest second-quarter results did not have the Ramirent acquisition included thus were not used.
Loxam’s main debt incurrence baskets are the credit facility basket and ratio basket. Interestingly, Loxam’s 2023 notes have a €1 billion credit facilities basket, €400 million below the €1.4 billion credit facilities basket of the other outstanding bonds. Based on the language in the offering memorandums for the 2019 issuances, utilization of the credit facilities basket stood at €1.225 billion leaving €175 million of headroom. The latest OM states that the RCF (€75 million), the 2022 Senior Secured Notes (€300 million), the 2023 Senior Secured Notes (€250 million), the 2024 Senior Secured Notes (€300 million), and the April 2026 Senior Secured Notes (€300 million) and any permitted refinancing indebtedness thereof that constitutes senior secured debt comes under the credit facility basket and may not be reclassified. In continuum the same should apply to 2023 SSN which has a lower credit facility basket of €1 billion, in that case, the €1.225 billion utilization under the latest bonds could be in breach of its permission under the 2023 indenture.
A source close to the situation said that there was no breach as under the 2023 SSN indenture. This is because since “only outstanding RCF debt, the 2023 SSNs, the old 2021 SSNs and any permitted refinancing Indebtedness thereof that constitutes senior secured debt must be incurred under the credit facilities basket and may not be reclassified”. The source added that Loxam's senior secured note issuances subsequent to the 2023 issuance, except for the portion of the April 2026 SSNs that were used to redeem the 2021 SSNs earlier this year, do not fall into any of those definitions and therefore may be freely reclassified as necessary under the terms of the 2023 SSN indenture.
This implies that certain of the debt stated under the 2019 issuances as not capable of being reclassified, would have been reclassified under the 2023 SSN in order to comply with basket cap under the 2023 SSN. As the credit facility basket is a single basket shared across all issuer’s notes (except for the increased capacity under notes issued after the 2023 SSN) then a reclassification of any of such debt under the 2023 SSN should also apply to the other existing notes. Such reclassification would not appear to be permitted under the 2019 issuances.
Reorg’s analysis of the issuer’s bond documentation highlights that with a consolidated coverage ratio of 4.78x as of March based on pro-forma EBITDA, Loxam has sufficient capacity to issue additional ratio debt as the company exceeded the 2.0x FCCR test. However, the company cannot issue additional priority debt (as it is so capped under the terms of its existing subordinated notes indentures) as the consolidated priority debt leverage ratio and the net consolidated priority debt leverage ratio exceeded the 4.0x limit imposed by the subordinated notes.
In the issuer’s bond documentation priority debt is defined as a secured debt plus both secured and unsecured debt of non-guarantor subsidiaries. The calculation of priority debt is shown below:
Although the company met the tightest ratio basket related to the issuance of secured debt, which is 3.85x consolidated senior secured leverage ratio under the SSN 2023 notes, with a margin of 0.43x, the company may not be able to take on more secured debt under the ratio baskets due to the lack of capacity to incur priority ratio debt under the subordinated notes.
Apart from the ratio baskets and the credit facility basket the company can also issue debt under general debt and purchase money and capital lease obligation baskets. General indebtedness is limited €153.7 and purchase money and capital lease obligations are limited to €128.1 million under all of the notes, with both baskets capable of being secured on the collateral or non-collateral assets, except that the general indebtedness basket can only be secured on non-collateral assets to the extent of available capacity under the general Permitted Liens basket of greater of €35 million and 2% of total assets. The company also has a €75 million receivables financing basket and a €5 million basket for management advances, among other baskets shown above.
The capital structure Pro-forma for the Ramirent acquisition is shown below:
(Click HERE to enlarge)
Debt capacity baskets calculated as of Pro-forma March 31 under each of the notes are shown below:
(Click HERE to enlarge)
(Click HERE to enlarge)
-- Noor U Sehur and Temitope Adesanya
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