Kantar Uses Unusual Special Mandatory Redemption; Swissport, Douglas CoC Currently Unavailable; Altice’s 2-Step Exchange Could Unlock RP Capacity

Reorg’s legal analysts comprehensively analyzed the impact of covenants in several special situations during February including whether the appointment of a receiver by the mezzanine lenders would trigger a change of control for Lycra’s bondholders.

In the context of performing credits, we analyzed a wide range of covenant issues, including Kantar’s clever use of its counter-intuitive special mandatory redemption, or SMR, the unlocking of restricted payments capacity at the Altice Luxembourg level through a bespoke exchange offer, whether a put option would be available for Swissport or Douglas’ bondholders and Stada’s current debt capacity to fund more acquisitions.

We also have begun to comprehensively track the impact of coronavirus and put together a compendium of high-yield bonds adversely affected by the spread of the virus. More updates and analysis on the impact of this possible pandemic on high-yield and leveraged credits will follow.
 
Reorg’s credit and legal analysts have been following the twists and turns of Lycra’s fortunes closely over the past few months. In the middle of February, we analyzed the complex capital structure to conclude that the appointment of a receiver by the $400 million mezzanine lenders of Shandong Ruyi at the parent level of Lycra would by itself be unlikely to trigger a change of control in the Lycra $690 million and €250 million bonds. The change of control analysis is HERE.

Later that month, change of control questions arose again when a Chinese court accepted Ruyi’s state-owned shareholder’s petition for freezing Ruyi’s 44.21% equity stake in Lycra’s onshore holding vehicle of Lycra.

KME’s parent Intek was facing a €101.7 million maturity on Feb. 20, along with the associated interest coupon of €5.1 million. Early in February, we examined the amount of cash leakage permitted from KME to Intek, in the event Intek’s refinancing plans did not work out. The dividend capacity calculations are HERE. Eventually, such leakage was not required as Intek was able to refinance its debt through the issue of new bonds and an exchange of existing bonds within the Feb. 20 deadline.
 
The surge of the Covid-19 virus cases outside of China, such as in Italy, has increased the pressure on several European junk-rated names, mainly in the transport and tourism industry. We created a compendium HERE of high-yield bonds whose prices fell in the wake of the virus. This coronavirus impact reckoner will be updated with additional analysis on a regular basis.

Kantar used its unusual SMR provisions to €47 million of its 9.25% 2027 senior notes at 98.612% (their issue price), plus accrued and unpaid interest. This method illustrates how sponsors could use documentary flexibility to reduce their acquisition debt burden in unexpected ways. Had the provision not been that expansive, the company would not have been able to redeem the senior notes without paying a premium.

We deconstructed the off-market and complex special mandatory redemption provisions HERE, illustrating how they were used to reduce acquisition debt costs and what lessons investors should learn from this.

Airport cargo and ground-handling company Swissport’s owner, HNA, is reported to be looking to dispose of the group by way of a share sale. Several potential U.S. investors, including Bain Capital and Centerbridge, are reported to be taking part in a new auction. Separately, it was reported that the Chinese government was in talks to acquire HNA.

On the change of control front, our review of the provisions of Swissport’s 2024 senior secureds and 2025 senior notes concluded that (i) the takeover by the Chinese government of HNA would be unlikely to trigger a 101% put in the Swissport bonds and (ii) the 4.75x net leverage portability carve-out was currently unavailable.

In any case, if a change of control did occur on the sale of Swissport by HNA, and the bonds were trading above 101%, as was the case at the time of writing, bondholders may not choose to exercise their put option.

Further, if the new purchaser did attempt to cut down the capital structure and replace the bonds with cheaper debt prior to August 15, 2021, there might be a way under the bond’s redemption provisions to allow it to reduce the make-whole premium it would otherwise need to pay. To see the change of control and redemption analysis in the Swissport bonds click HERE.

Stada has increased its net debt burden from €2.773 billion in September 2017 to €4.626 billion pro forma for the €350 million tap priced on Jan. 30, to fund a number of acquisitions.

In February, Stada AG agreed to acquire 15 healthcare brands from GlaxoSmithKline. Neither the German pharmaceutical company nor GSK disclosed the overall value of the deal, but Reuters quoted it to be more than €300 million.

Our analysis concluded that Stada’s debt incurrence capacity under its bonds is substantial should it decide to fund this acquisition with debt. On Feb. 3, we assessed that the group could have an additional €1.068 billion of capacity available between the third limb of the credit facility basket and the general debt basket in its 2024 senior secured bonds. A detailed analysis of Stada’s debt capacity under its bond covenants can be found HERE.

CVC is reported to be exploring options to either sell or list perfume and cosmetics retailer, Douglas.

We examined the availability of the 5.25x net leverage portability carve-out in Douglas’ 2022 senior secured and 2023 senior notes and calculated the current consolidated net leverage using covenant definitions to be 6.34x, meaning that the portability provision was currently unavailable.

While an IPO would be unlikely to trigger a change of control under the bonds, it could increase the amount of dividend capacity. To see Douglas’ change of control and restricted payments analysis click HERE.

Altice’s two-step exchange offer could result in unlocking restricted payments capacity for Altice Luxembourg SA, freeing up billions of potential dividends to equity (subject to any dividend restrictions under its other debt documents). This could be achieved without the payment of any consent fees or redemption premium to the bondholders. An analysis of the bespoke and complex exchange mechanism which Altice inserted into its bond documentation last year to achieve this broadening of restricted payments capacity at the Luxembourg (holding company) level can be seen HERE.

Montreal-headquartered Bombardier announced the sale of its transportation business to Alstom. Net proceeds could amount to $4.2 billion to $4.5 billion after the retirement of convertible shares held by CDPQ (Caisse de dépôt et placement du Québec) in Bombardier Transportation.

Despite Bombardier’s junk credit rating, its bonds (that were available for review) have limited investor protection, similar to that offered by investment grade-style bonds.

Although Bombardier Transportation is a material subsidiary, on a qualitative basis, its standalone sale would be unlikely to trigger the asset sales covenant or the change of control covenant in the bonds. See our analysis HERE.

OHL is considering absorbing the construction business of Mexico’s Caabsa Infraestructuras SA. (entity owned by the Amodio family) and in return OHL would grant the Amodio family a share of not less than 31% or greater than 35% of the capital of OHL. Caabsa Infraestructuras is expected to provide a €50 million capital injection in OHL as part of the transaction.

We analyzed the covenant implications of the above proposed transaction in OHL’s 2020, 2022 and 2023 senior notes HERE.

The share sale by OHL would likely not trigger a 101% change-of-control put option. The capital injection in OHL by Caabsa could increase restricted payments capacity. Whether or not the debt covenant in OHL’s bonds would be implicated as a result of any debt Caabsa brought with it, would depend on whether Caabsa joined the OHL group as a recourse or a non-recourse subsidiary.

Telecoms infrastructure service provider U.S.’ Zayo Group’s recent 7NC1 senior secured issue has sparked concern among European investors of further erosion of the protective non-call feature. Typically, non-call protection for a seven-year bond would be at least three years. Click HERE to see the market standard for five, six, seven and eight-year non-call periods in European fixed rate bonds in 2018 and 2019.