Mon 08/02/2021 14:25 PM
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Relevant Items:
Covenants Tear Sheet, Debt Document Summaries
The AZEK Company Debt Documents

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The AZEK Company, a portfolio company of, and majority owned by, Ares Corporate Opportunities Fund IV LP and the Ontario Teachers’ Pension Plan Board, is a leading manufacturer of premium, low-maintenance building products for residential, commercial and industrial markets. It completed its IPO in June 2020.

In the second quarter, which ended March 31, AZEK’s gross profit increased 23.3% year over year, primarily driven by strong residential segment sales. During the second quarter, the company amended both its term loan and ABL facility to decrease pricing; the ABL maturity date was also extended by roughly four years.

The company’s capital structure is shown below for reference.

On May 12, 2020, Azek issued $350 million of 9.5% senior notes due 2025. However, in connection with the company’s IPO, it redeemed the 2025 notes at 107.125%.
Covenant Conclusions

 

  • Springing financial covenant - Under the ABL facility, if availability is less than the greater of $12.5 million and 10% of the line cap, The AZEK Company Inc. (“Holdings”) must maintain a fixed charge coverage ratio of at least 1x. The covenant testing period continues until availability exceeds such threshold for 30 consecutive days, and equity cures are permitted.This covenant is not currently tested, but if it were, the company would be in compliance.

  • Debt and lien capacity - The term loan permits incremental loans or incremental equivalent debt in an amount equal to $150 million, plus the amount of voluntary prepayments of the term loans (which is at least $338 million, the amount the company prepaid using IPO proceeds), plus additional amounts as long as the first lien net leverage ratio is less than or equal to 4.5x. Incremental loans and incremental equivalent debt can both be secured on a pari basis, secured on a junior basis or unsecured; however, any debt incurred using this basket is treated as first lien debt for purposes of calculating the first lien leverage ratio.The ABL permits term loan debt of $625 million, plus the amount of incremental term loans or incremental equivalent term debt that was permitted by the term loan agreement as of the original closing date, which was Sept. 30, 2013. Only the amended and restated term loan is publicly available, but for purposes of this article we assume that the original term loan contained the same incremental baskets.

    The term loan incremental basket currently permits at least $1,269 million of additional first lien debt that is pari with the term loans, which debt is subject to 50 bps of most favored nations, or MFN, protection. When this is combined with a 2x fixed charge coverage ratio debt basket and a general liens basket, the company can incur $1,329 million of total debt pari with the term loans.

    Both the ABL and term loan also include a basket that permits secured debt if the gross secured leverage ratio is not greater than 5.25x; this basket currently permits about $813 million of additional debt capacity. This debt can be secured by the collateral; the liens must be junior to the term loan’s liens on both the ABL priority collateral and term priority collateral, but the liens can be senior to the ABL facility’s liens on the term priority collateral.

    Unsecured debt is permitted by both agreements as long as the fixed charge coverage ratio is at least 2x.

  • Restricted payments, investments - The company can make unlimited restricted payments and investments under both the term loan and the ABL facility, on the basis of second-quarter financials. The term loan permits restricted payments and investments if the gross total leverage ratio is not greater than 4.25x; the ABL permits restricted payments as long as the “Payment Conditions” are met and permits investments as long as the “Investment Conditions” are met.The Payment Conditions are:

    1. No default or event of default; and

    2. On a pro forma basis, either (i) availability is at least 12.5% of the line cap at such time and for the preceding 30 days and the fixed charge coverage ratio is at least 1x, or (ii) availability is at least 17.5% of the line cap at such time and for the preceding 30 days

    The Investment Conditions are identical except that instead of 17.5% of the line cap in clause 2(ii), they require only 15%.

  • IPO proceeds - The company has additional flexibility to incur debt, pay dividends, make investments and prepay certain debt based on the proceeds it received from its IPO in June 2020.Under the ABL, the proceeds from the IPO can be used (i) to provide additional unsecured debt capacity under an equity proceeds debt basket, (ii) to increase the amount of employee buybacks that are permitted, or (iii) to increase the amount of prepayments that can be made of restricted debt (including the term loans).

    The term loan permits IPO proceeds to be used (i) to increase the “Available Amount,” which can be used to make restricted payments, investments or restricted debt prepayments, (ii) to provide additional unsecured debt capacity under an equity proceeds debt basket, (iii) to increase the amount of employee buybacks that are permitted, or (iv) to increase the amount of prepayments that can be made of restricted debt (payment subordinated debt or unsecured debt incurred using the equity proceeds debt basket).

    Post-IPO, the company also has access to a restricted payment basket under both credit agreements equal to the greater of 6% of the net cash proceeds from any public offering and 5% of market capitalization.

  • Term loan prepayments - The ABL restricts the company’s ability to make voluntary repayments of the term loan if the Payment Conditions are not met. A $25 million general basket is available; as mentioned above, the IPO proceeds can also be used to make such prepayments.

  • Pro rata sharing and lien subordination amendments - Both the term loan and the ABL require the consent of each lender to subordinate the liens on “all or substantially all” of the collateral. They also prohibit changing the pro rata provisions without the consent of each lender adversely affected thereby.


--Alisha Turak
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