2026 2L Notes Core Analysis
Ahern Rentals is issuing $550 million of second lien notes due 2026 (the “2026 2L Notes”), with proceeds to be used to redeem the company’s second lien notes due 2023.
Ahern Rentals’ capital structure as of June 30, adjusted for the issuance of the 2026 2L Notes, is illustrated below:
Ahern’s eight existing foreign subsidiaries will guarantee the 2026 2L Notes at issuance; the guarantees of foreign subsidiaries are senior but unsecured, unless the guarantees provided under the company’s first lien ABL facility are secured, in which case the guarantees will become secured.
According to the offering memorandum, “Initially, the Existing Foreign Subsidiaries will not grant a lien on any assets to secure the First Lien Obligations or the Notes and there is currently no plan by the Issuer to grant such a lien”; as a result, the 2026 2L Notes will not be secured at issuance by any assets of the foreign subsidiaries
They will, however, be secured by substantially all assets of Ahern Rentals and any domestic guarantors, including (i) all owned equity of each subsidiary, 65% of the voting securities of foreign subsidiaries directly owned by the guarantors (and 100% of non-voting securities), (ii) all real and personal property, (iii) intercompany debt and (iv) proceeds thereof.
Although Ahern does not have any domestic subsidiaries at issuance, the 2026 2L Notes require that each of the company’s future domestic subsidiaries, and any other subsidiary, that guarantees any of Ahern’s obligations or the obligations of any domestic subsidiary must guarantee the 2026 2L Notes.
A comprehensive report on the 2026 2L Notes is available HERE.
Flexibility Under the 2026 2L Notes
Aherns’ flexibility to incur debt and liens, transfer assets to unrestricted subsidiaries and pay dividends under the 2026 2L Notes is shown below:
Prominent issues under the 2026 2L Notes include:
- “First Lien Obligations,” “Second Priority Liens” - The definition of “First Lien Obligations” under the 2026 2L Notes refers only to debt permitted to be incurred under a credit agreement debt basket that provides capacity not to exceed the greater of $650 million and the sum of 85% of accounts receivable, plus 90% of rental and sale equipment (and other equipment), plus 65% of inventory.The definition of “Second Priority Liens” under the 2026 2L Notes refers only to the 2026 2L Notes and any additional notes.The 2026 2L Notes also permit liens securing additional notes not to exceed $50 million, plus additional amounts in compliance with a 4.75x “Adjusted Net Debt to Adjusted EBITDAR Ratio.” This liens capacity can be paired with a $50 million general-purpose debt basket and a ratio debt basket, subject to compliance with a 2x consolidated coverage ratio.We assume the intent was to limit first and second lien debt to debt under the Credit Agreement Debt basket (for first lien debt) and to the 2026 2L Notes and Additional Notes (for second lien debt).
However, to the extent the intercreditor agreement will allow all permitted secured debt under the 2026 2L Notes to be secured on a first or second lien basis on the collateral, the $50 million general debt basket (which has a corresponding liens basket) and the $5 million general liens basket (which can be paired with the 2x interest coverage ratio debt basket) would also be permitted to be pari or senior secured to the 2026 2L Notes.
- Builder basket accessible only if the affiliate loan repayment undertakings have been satisfied; capacity based on net debt to EBITDAR - A builder basket that can be used for dividends and investments is accessible only if Ahern has satisfied the “Affiliate Loan Repayment Undertakings” that require it to make all payments on any affiliate loans when due, to repay the DFA Loan in full at maturity in March 2022 and to repay the Xtreme Loan and the Snorkel Loan in full at maturity in November 2023.Rather than the typical builder basket under high-yield bonds that provides capacity based on 50% of consolidated net income, the builder basket under the 2026 2L Notes provides capacity based on a percentage of consolidated net income that itself is based on Ahern’s pro forma adjusted net debt to adjusted EBITDAR ratio; failure to satisfy the Affiliate Loan Repayment Undertaking will not result in a default or event of default under the 2026 2L Notes but will prohibit Ahern from accessing the builder basket.
- Limitations on new business branches - The 2026 2L Notes prohibit Ahern from opening any new business branches for the remainder of 2021 and do not permit the company to open any business branches in any other fiscal year which result in an increase in the total number of business branches in excess of 5% of the number of business branches at the beginning of such calendar year.
- Lien subordination amendments - Although amendments that release liens on the collateral require consent of all holders of the 2026 2L Notes, amendments that subordinate the liens securing the 2026 2L Notes likely require consent from only a majority of noteholders, given that such amendments are not included in the list of amendments requiring all holders to consent.
Holder Protections, Aggressive Terms Under the 2026 2L Notes
The following table summarizes the presence of certain material holder protections and material aggressive terms included in the 2026 2L Notes: