Envision Healthcare Corporation
UPDATE 1: Primary Coverage: Envision’s Ability Under New 2026 Notes to Pay Dividends and Transfer Assets to Unrestricted Subsidiaries Is Significant
Mon 10/01/2018 12:24 PM
UPDATE 1: 12:24 p.m. ET 10/1/2018: This article has been updated to reflect updated deal terms, including the issuance being downsized by $400 million and the Senior Credit Facilities being upsized by $400 million; Envision is likely unable to reclassify outstanding Senior Credit Facilities following the upsizing.
In connection with Kohlberg Kravis Roberts’ $5.57 billion acquisition of Envision Healthcare Corp. (“Envision”), Enterprise Merger Sub Inc., which will later be merged into Envision, is issuing $1.225 billion of senior unsecured notes due 2026 (the “2026 Notes”). In addition to the 2026 Notes, Envision will (i) enter in a senior secured term loan and revolving credit facility (the “First Lien Credit Agreement”) that will provide a $5.45 billion term loan and $300 million revolver, (ii) enter into a $550 million asset-based revolving credit facility (together with the First Lien Credit Agreement, the “Senior Credit Facilities”) and (iii) issue $525 million of privately placed senior unsecured notes due 2026.
Envision’s capital structure as of June 30, adjusted for the acquisition, is illustrated below for reference.
Although the 2026 Notes will be guaranteed by each of Envision’s domestic wholly owned subsidiaries that guarantee the Senior Credit Facilities, as disclosed in the 2026 Notes’ Offering Memorandum (the “Offering Memorandum”):
“[o]n a pro forma basis after giving effect to the Transactions, the non-guarantor subsidiaries and consolidated entities would have accounted for approximately $6.3 billion, or 77%, of our consolidated net revenue for the twelve months ended June 30, 2018. As of June 30, 2018, on a pro forma basis after giving effect to the Transactions, excluding the effect of intercompany balances as well as intercompany transactions, the non-guarantor subsidiaries and consolidated entities would have accounted for $5.1 billion, or 35%, of our consolidated total assets, and approximately $2.2 billion, or 23%, of our consolidated total liabilities.”
Although the 2026 Notes require Envision to file all annual and quarterly financial statements that would be required to be included in a 10-K and 10-Q, despite non-guarantor subsidiaries accounting for approximately 77% of consolidated net revenue and 35% of consolidated total assets, they do not require Envision to deliver consolidating financial information.
On the basis of the financials disclosed in the Offering Memorandum, Envision’s secured leverage ratio and total leverage ratio following the consummation of the acquisition will be approximately 4.77x and 6.95x, respectively.
Envision’s secured and total leverage ratio will not allow it to access certain leverage-based negative covenant baskets included in the following chart.
The Builder Basket - As illustrated in the 2026 Notes Summary, the 2026 Notes permit Envision to make restricted payments, prepay payment subordinated debt and to make investments from a builder basket that is based on 100% of Consolidated EBITDA less 1.5x interest expense and that also includes a starter basket equal to the greater of $355 million and 35% of EBITDA.
The definition of “Consolidated EBITDA” includes add-backs for:
“[T]he amount of “run rate” cost savings, operating expense reductions, synergies and pricing improvements related to [actions or initiatives] … projected by [Envision] in good faith to be realized as a result of actions that have been taken or initiated or are expected to be taken ... within 24 months of such [action or initiative][.]”
Because the builder basket increases on account of actions or initiatives “projected … to be realized as a result of actions that have been taken or initiated or are expected to be taken” within 24 months, it could provide Envision with a significant amount of additional dividend and investment capacity. Notably, Envision is not required to meet a leverage test in order to access the builder basket.
Investments in Unrestricted Subsidiaries - As illustrated in the 2026 Notes Summary, Envision’s capacity to transfer assets to unrestricted subsidiaries is substantial. In addition to at least $430 million of investments under both a general basket and a similar business basket, the company can make at least $255 million of additional investments under an unrestricted subsidiaries investment basket. Envision can make at least $355 million of such investments under the builder basket and $355 million of additional investments using a general restricted payments basket.
Taken together, the 2026 Notes likely permit Envision to make at least $1.825 billion of investments in unrestricted subsidiaries.
Debt and Liens - As illustrated in the 2026 Notes Summary, the 2026 Notes permit Envision to incur Credit Facilities debt not to exceed $5.35 billion, plus the greater of $1.016 billion and 100% of EBITDA, plus, following the incurrence of such debt, additional amounts in compliance with a 4.83x secured leverage ratio. A separate Credit Facilities basket permits debt under the ABL not to exceed $550 million and the borrowing base.
Envision can also incur ratio debt, subject to meeting either a 2x fixed-charge coverage ratio or a 6.95x total leverage ratio, and can secure any permitted debt with leverage liens if it can meet a 4.83x secured leverage ratio.
Given Envision’s approximately 6.95x total leverage ratio at issuance, it is likely unable to reclassify First Lien Credit Agreement debt as ratio debt given its.
As such, the Credit Facilities debt basket likely permits Envision to incur at least $916 million of additional secured debt.
The 2026 Notes also include a general debt basket permitting at least $510 million of debt that can be secured by a corresponding liens basket.
Taken together,the 2026 Notes likely permit Envision to incur about $1.4 billion of additional secured debt.
Original Story 1:49 p.m. UTC on Sep. 25, 2018
Primary Coverage: Reclassification Provisions Under Envision’s New 2026 Notes Likely Permit Significant Amount of Additional Secured Debt
For a complete overview of the terms and provisions of Envision’s new 2026 Notes, click HERE.
In connection with Kohlberg Kravis Roberts’ $5.57 billion acquisition of Envision Healthcare Corp. (“Envision”), Enterprise Merger Sub Inc., which will later be merged into Envision, is issuing $1.625 billion of senior unsecured notes due 2026 (the “2026 Notes”). In addition to the 2026 Notes, Envision will (i) enter into a senior secured term loan and revolving credit facility (the “First Lien Credit Agreement”) that will provide a $5.05 billion term loan and $300 million revolver, (ii) enter into a $550 million asset-based revolving credit facility (together with the First Lien Credit Agreement, the “Senior Credit Facilities”) and (iii) issue $525 million of privately placed senior unsecured notes due 2026.
Envision’s capital structure as of June 30, adjusted for the acquisition, is illustrated below for reference.
Although the 2026 Notes will be guaranteed by each of Envision’s domestic wholly owned subsidiaries that guarantee the Senior Credit Facilities, as disclosed in the 2026 Notes’ Offering Memorandum (the “Offering Memorandum”):
Although the 2026 Notes require Envision to file all annual and quarterly financial statements that would be required to be included in a 10-K and 10-Q, despite nonguarantor subsidiaries accounting for approximately 77% of consolidated net revenue and 35% of consolidated total assets, they do not require Envision to deliver consolidating financial information.
On the basis of the financials disclosed in the Offering Memorandum, Envision’s secured leverage ratio and total leverage ratio following the consummation of the acquisition will be approximately 4.77x and 6.95x, respectively.
Envision’s secured and total leverage ratio will allow it to access certain leverage-based negative covenant baskets included in the following chart.
Debt and Liens - The 2026 Notes permit Envision to incur Credit Facilities debt not to exceed $5.35 billion, plus the greater of $1.016 billion and 100% of EBITDA, plus, following the incurrence of such debt, additional amounts in compliance with a 4.83x secured leverage ratio. A separate Credit Facilities basket permits debt under the ABL not to exceed $550 million and the borrowing base.
Envision can also incur ratio debt, subject to meeting either a 2x fixed-charge coverage ratio or a 6.95x total leverage ratio, and can secure any permitted debt with leverage liens if it can meet a 4.83x secured leverage ratio.
Although reclassification provisions require that outstanding debt under the Senior Credit Facilities on the issue date will be deemed to have been incurred under the Credit Facilities debt basket, there is no explicit restriction on such debt later being reclassified.
As such, following the issuance of the 2026 Notes, Envision’s pro forma 4.77x secured leverage ratio and 6.95x total leverage ratio may enable the company to reclassify outstanding debt under the Senior Credit Facilities as having been incurred under the ratio debt basket and secured by leverage liens.
The 2026 Notes also include a general debt basket permitting at least $510 million of debt that can be secured by a corresponding liens basket.
Taken together, assuming Envision reclassifies outstanding term loans under the First Lien Credit Agreement, the 2026 Notes may permit Envision to incur about $6.9 billion of additional secured debt.
Investments in Unrestricted Subsidiaries - As illustrated in the 2026 Notes Summary, Envision’s capacity to transfer assets to unrestricted subsidiaries is substantial. In addition to at least $430 million of investments under both a general basket and a similar business basket, the company can make at least $255 million of additional investments under an unrestricted subsidiaries investment basket. Envision can make additional such investments under a builder basket based on 100% of EBITDA less 1.5x interest expense that also includes a $355 million starter basket and if it chooses can make $355 million of investments using a general restricted payments basket.
Taken together, the 2026 Notes likely permit Envision to make at least $1.825 billion of investments in unrestricted subsidiaries.
For a complete overview of the terms and provisions of Envision’s new 2026 Notes, click HERE.
Capital Structure and Use of Proceeds
In connection with Kohlberg Kravis Roberts’ $5.57 billion acquisition of Envision Healthcare Corp. (“Envision”), Enterprise Merger Sub Inc., which will later be merged into Envision, is issuing $1.225 billion of senior unsecured notes due 2026 (the “2026 Notes”). In addition to the 2026 Notes, Envision will (i) enter in a senior secured term loan and revolving credit facility (the “First Lien Credit Agreement”) that will provide a $5.45 billion term loan and $300 million revolver, (ii) enter into a $550 million asset-based revolving credit facility (together with the First Lien Credit Agreement, the “Senior Credit Facilities”) and (iii) issue $525 million of privately placed senior unsecured notes due 2026.
Envision’s capital structure as of June 30, adjusted for the acquisition, is illustrated below for reference.
Although the 2026 Notes will be guaranteed by each of Envision’s domestic wholly owned subsidiaries that guarantee the Senior Credit Facilities, as disclosed in the 2026 Notes’ Offering Memorandum (the “Offering Memorandum”):
“[o]n a pro forma basis after giving effect to the Transactions, the non-guarantor subsidiaries and consolidated entities would have accounted for approximately $6.3 billion, or 77%, of our consolidated net revenue for the twelve months ended June 30, 2018. As of June 30, 2018, on a pro forma basis after giving effect to the Transactions, excluding the effect of intercompany balances as well as intercompany transactions, the non-guarantor subsidiaries and consolidated entities would have accounted for $5.1 billion, or 35%, of our consolidated total assets, and approximately $2.2 billion, or 23%, of our consolidated total liabilities.”
Although the 2026 Notes require Envision to file all annual and quarterly financial statements that would be required to be included in a 10-K and 10-Q, despite non-guarantor subsidiaries accounting for approximately 77% of consolidated net revenue and 35% of consolidated total assets, they do not require Envision to deliver consolidating financial information.
Notable Concerns
On the basis of the financials disclosed in the Offering Memorandum, Envision’s secured leverage ratio and total leverage ratio following the consummation of the acquisition will be approximately 4.77x and 6.95x, respectively.
Envision’s secured and total leverage ratio will not allow it to access certain leverage-based negative covenant baskets included in the following chart.
The Builder Basket - As illustrated in the 2026 Notes Summary, the 2026 Notes permit Envision to make restricted payments, prepay payment subordinated debt and to make investments from a builder basket that is based on 100% of Consolidated EBITDA less 1.5x interest expense and that also includes a starter basket equal to the greater of $355 million and 35% of EBITDA.
The definition of “Consolidated EBITDA” includes add-backs for:
“[T]he amount of “run rate” cost savings, operating expense reductions, synergies and pricing improvements related to [actions or initiatives] … projected by [Envision] in good faith to be realized as a result of actions that have been taken or initiated or are expected to be taken ... within 24 months of such [action or initiative][.]”
Because the builder basket increases on account of actions or initiatives “projected … to be realized as a result of actions that have been taken or initiated or are expected to be taken” within 24 months, it could provide Envision with a significant amount of additional dividend and investment capacity. Notably, Envision is not required to meet a leverage test in order to access the builder basket.
Investments in Unrestricted Subsidiaries - As illustrated in the 2026 Notes Summary, Envision’s capacity to transfer assets to unrestricted subsidiaries is substantial. In addition to at least $430 million of investments under both a general basket and a similar business basket, the company can make at least $255 million of additional investments under an unrestricted subsidiaries investment basket. Envision can make at least $355 million of such investments under the builder basket and $355 million of additional investments using a general restricted payments basket.
Taken together, the 2026 Notes likely permit Envision to make at least $1.825 billion of investments in unrestricted subsidiaries.
Debt and Liens - As illustrated in the 2026 Notes Summary, the 2026 Notes permit Envision to incur Credit Facilities debt not to exceed $5.35 billion, plus the greater of $1.016 billion and 100% of EBITDA, plus, following the incurrence of such debt, additional amounts in compliance with a 4.83x secured leverage ratio. A separate Credit Facilities basket permits debt under the ABL not to exceed $550 million and the borrowing base.
Envision can also incur ratio debt, subject to meeting either a 2x fixed-charge coverage ratio or a 6.95x total leverage ratio, and can secure any permitted debt with leverage liens if it can meet a 4.83x secured leverage ratio.
Given Envision’s approximately 6.95x total leverage ratio at issuance, it is likely unable to reclassify First Lien Credit Agreement debt as ratio debt given its.
As such, the Credit Facilities debt basket likely permits Envision to incur at least $916 million of additional secured debt.
The 2026 Notes also include a general debt basket permitting at least $510 million of debt that can be secured by a corresponding liens basket.
Taken together,the 2026 Notes likely permit Envision to incur about $1.4 billion of additional secured debt.
Original Story 1:49 p.m. UTC on Sep. 25, 2018
Primary Coverage: Reclassification Provisions Under Envision’s New 2026 Notes Likely Permit Significant Amount of Additional Secured Debt
For a complete overview of the terms and provisions of Envision’s new 2026 Notes, click HERE.
Capital Structure and Use of Proceeds
In connection with Kohlberg Kravis Roberts’ $5.57 billion acquisition of Envision Healthcare Corp. (“Envision”), Enterprise Merger Sub Inc., which will later be merged into Envision, is issuing $1.625 billion of senior unsecured notes due 2026 (the “2026 Notes”). In addition to the 2026 Notes, Envision will (i) enter into a senior secured term loan and revolving credit facility (the “First Lien Credit Agreement”) that will provide a $5.05 billion term loan and $300 million revolver, (ii) enter into a $550 million asset-based revolving credit facility (together with the First Lien Credit Agreement, the “Senior Credit Facilities”) and (iii) issue $525 million of privately placed senior unsecured notes due 2026.
Envision’s capital structure as of June 30, adjusted for the acquisition, is illustrated below for reference.
Although the 2026 Notes will be guaranteed by each of Envision’s domestic wholly owned subsidiaries that guarantee the Senior Credit Facilities, as disclosed in the 2026 Notes’ Offering Memorandum (the “Offering Memorandum”):
“[o]n a pro forma basis after giving effect to the Transactions, the non-guarantor subsidiaries and consolidated entities would have accounted for approximately $6.3 billion, or 77%, of our consolidated net revenue for the twelve months ended June 30, 2018. As of June 30, 2018, on a pro forma basis after giving effect to the Transactions, excluding the effect of intercompany balances as well as intercompany transactions, the non-guarantor subsidiaries and consolidated entities would have accounted for $5.1 billion, or 35%, of our consolidated total assets, and approximately $2.2 billion, or 23%, of our consolidated total liabilities.”
Although the 2026 Notes require Envision to file all annual and quarterly financial statements that would be required to be included in a 10-K and 10-Q, despite nonguarantor subsidiaries accounting for approximately 77% of consolidated net revenue and 35% of consolidated total assets, they do not require Envision to deliver consolidating financial information.
Notable Concerns
On the basis of the financials disclosed in the Offering Memorandum, Envision’s secured leverage ratio and total leverage ratio following the consummation of the acquisition will be approximately 4.77x and 6.95x, respectively.
Envision’s secured and total leverage ratio will allow it to access certain leverage-based negative covenant baskets included in the following chart.
Debt and Liens - The 2026 Notes permit Envision to incur Credit Facilities debt not to exceed $5.35 billion, plus the greater of $1.016 billion and 100% of EBITDA, plus, following the incurrence of such debt, additional amounts in compliance with a 4.83x secured leverage ratio. A separate Credit Facilities basket permits debt under the ABL not to exceed $550 million and the borrowing base.
Envision can also incur ratio debt, subject to meeting either a 2x fixed-charge coverage ratio or a 6.95x total leverage ratio, and can secure any permitted debt with leverage liens if it can meet a 4.83x secured leverage ratio.
Although reclassification provisions require that outstanding debt under the Senior Credit Facilities on the issue date will be deemed to have been incurred under the Credit Facilities debt basket, there is no explicit restriction on such debt later being reclassified.
As such, following the issuance of the 2026 Notes, Envision’s pro forma 4.77x secured leverage ratio and 6.95x total leverage ratio may enable the company to reclassify outstanding debt under the Senior Credit Facilities as having been incurred under the ratio debt basket and secured by leverage liens.
The 2026 Notes also include a general debt basket permitting at least $510 million of debt that can be secured by a corresponding liens basket.
Taken together, assuming Envision reclassifies outstanding term loans under the First Lien Credit Agreement, the 2026 Notes may permit Envision to incur about $6.9 billion of additional secured debt.
Investments in Unrestricted Subsidiaries - As illustrated in the 2026 Notes Summary, Envision’s capacity to transfer assets to unrestricted subsidiaries is substantial. In addition to at least $430 million of investments under both a general basket and a similar business basket, the company can make at least $255 million of additional investments under an unrestricted subsidiaries investment basket. Envision can make additional such investments under a builder basket based on 100% of EBITDA less 1.5x interest expense that also includes a $355 million starter basket and if it chooses can make $355 million of investments using a general restricted payments basket.
Taken together, the 2026 Notes likely permit Envision to make at least $1.825 billion of investments in unrestricted subsidiaries.
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