Tue 03/03/2020 10:51 AM
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The deluge of primary issuance seen in the first month of 2020 cooled considerably in February with the earnings season causing the lull in the first few weeks, and the potential impact of coronavirus chilling issuance in the final week of the month.

Fugro postponed its debut bond issue due to “adverse market conditions.” The frenetic pace of repricings in the loans world, which is usually more insulated from macro-shocks than equities or high yield, also slowed towards the end of the month. Three loan repricings were canceled in the wake of Covid-19, reportedly due to a souring of sentiment toward risk assets.
 

In bonds, covenants coming to market continued the trend of unraveling traditional controls on value leakage from asset sales. Such erosion comes in many forms: through express covenant carve-outs as well as through leverage incurrence ratios becoming less representative of the true reported leverage. Elsewhere, ratio-based portability gained further ground in European bonds - present in more than 40% of high-yield bonds issued in 2020.

Fedrigoni managed to obtain covenant flexibilities in its new €225 million senior secured FRNs that had been previously blocked by investors in its debut FRNs issued in 2018. The Italian paper manufacturer’s 2026 notes allow it to distribute proceeds to shareholders from assets sales contributing up to 40% of consolidated EBITDA so long as its net leverage does not exceed 4x net leverage (which can be calculated with liberal management discretion). These new notes also include portability at 3.9x (which is set around an opening leverage of 3.88x) to ease Bain Capital’s future exit.

However, these two additional covenant flexibilities in Fedrigoni’s 2026 notes are absent in its existing 2024 notes, which means that if Fedrigoni wishes to use them it will need to pay a consent fee to the holders of the 2024s, or refinance the 2024s (the notes can be optionally redeemed at par from May 31, 2020) with debt that includes those provisions. Despite a materially weaker covenant package than the existing 2024 notes, the 2026s priced at Euribor+4.125% at par, tight of guidance. Debt Explained’s Snapshot analysis on the 2026 notes can be found HERE.

Q-Park’s €1.455 billion (equivalent) three-tranche senior secured bond (preliminary terms) also included the off-market ability to sell assets to create dividend capacity. The Dutch car operator’s bonds include a leverage based asset sales step-down mechanism, which, when coupled with a generous 7.5x net leverage based restricted payments carve-out, will allow it to upstream 100% of asset sale proceeds if its pro forma net leverage is 6x, or 50% if less than 6.5x. The inclusion of a restricted payments carve-out set at 7.5x net leverage when opening leverage was only 6.9x, is eye-watering, made worse by off-market calculation flexibilities built into the documentation. The provisions also include a one-time use portability set at 7x net leverage (at or slightly above opening leverage). Debt Explained’s Snapshot analysis on Q-Park’s €1.455 billion (equivalent) bond can be found HERE.

Another variation on the theme of generating dividend capacity from selling assets was seen in the Catalent issuance. The preliminary terms of the U.S-headquartered pharmaceutical company’s €825 million (increased from €450 million) 2028 senior notes contain a provision that allows for asset sale proceeds that have been offered for prepayment but waived by the respective creditors, to increase dividend capacity under the CNI buildup basket. This flexibility was absent in the 2024 notes that these 2028s refinance. Debt Explained’s covenant analysis on the issuance can be found HERE.

Similar to Catalent, the TalkTalk refinancing 2025 senior notes also upsized to £575 million from £500 million. The U.K. broadband provider introduced portability, set at 3.5x net leverage, a turn higher than an opening leverage of 2.4x. The ratio can be calculated with significant flexibility, which could cause the covenant test to depart from the actual leverage. Debt Explained’s Snapshot analysis on the 2025 notes can be found HERE.

There was a dramatic change in the equity and credit markets towards the end of the month with investors pulling back from risk assets. While the impact was most strongly felt in the equity markets, high-yield credit and loans in primary were not left unscathed.

German gases specialist Messer Industries postponed the repricing of its cross-border €540 million and $2.206 billion first lien senior secured term loan Bs. AlixPartners became the second issuer in the last week of February to postpone a repricing on its €347 million term loan also citing adverse market conditions. In contrast, last month, the issuer’s ~ $1.5 billion term loan was reported to have been repriced to LIBOR+250% from L+275%. Minimax was the third to pull the repricing of its €506 million and $590 million term loans. It is reported that both these cancellations came as sentiment to risk assets soured, in the wake of coronavirus.

In this dramatic week, bond debutante Fugro also succumbed to dramatic gyrations in risk assets. Dutch geo-data services company Fugro has decided not to proceed with the planned offering of €500 million senior secured notes due to adverse market conditions.

Against this volatile backdrop, with market confidence waning in the aftermath of the coronavirus, bankers will need to gauge when to bring fresh issuance back into the European primary markets.

Investors, for their part, will need to identify which of their credits will be most severely affected by the spread of the virus, and assess the length and severity of the disruption.

We at Reorg are actively monitoring and assessing the impact of coronavirus. If you wish to read more of our global coronavirus impact analysis series (including on Lycra, Naviera and JLR in Europe) please email questions@reorg.com.
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