Beazer’s Ability to Meet Targeted Net Leverage; Visteon, KAR Auction Services Initiation; Analysis of Week’s Primary Deals

Editor's Note: Below is Reorg Covenants’ review of coverage for the week ended Friday, Feb. 14. We provide a summary of event-driven secondary analysis and new high-yield issuances and trends. We also list the top 10 most popular covenants analysis pieces downloaded from the Reorg site.
 
This week in the primary market, we reviewed issuances by APX Group, Block Communications and Hecla Mining. We compare the issuers’ ability to layer existing debt and pay out dividends and other key drivers of credit protection with Reorg’s Flexibility Scale, finding that while APX’s notes provided significantly more flexibility to incur secured debt, Block Communications’ notes provided significantly more flexibility to pay dividends; Block Communications’ and Hecla’s notes provide significant flexibility to transfer assets to unrestricted subsidiaries.

In the secondary market, we focused on developments with Beazer Homes. While the company’s management is targeting a net leverage profile of below 5x, a reduction of 1.5x turns on net leverage of 6.5x as of Dec. 31, 2019, provisions in its revolver may significantly limit the company’s ability to purchase its outstanding unsecured notes in the open market.

We also initiated coverage on Visteon and KAR Auction Services.
   
Here are the most downloaded covenants tear sheets and debt document summaries for the week ended Friday, Feb. 14:
 

1. Intelsat’s Covenants Tear Sheet
2. GTT Communications’ Covenants Tear Sheet
3. Steak ‘n Shake’s Credit Agreement Summary
4. Diamond Offshore Drilling’s Covenants Tear Sheet
5. Endo International’s Covenants Tear Sheet
6. Frontier’s Covenants Tear Sheet
7. Gulfport’s Covenants Tear Sheet
8. Party City’s Covenants Tear Sheet
9. Uniti’s Covenants Tear Sheet
10. Adient’s Covenants Tear Sheet
     

Reorg Covenants initiated coverage on Visteon Corp. For a summary of the terms and provisions under Visteon’s debt documents, click here. For Visteon’s covenants tear sheet, click here.

We also initiated coverage on KAR Auction Services. For a summary of the terms and provisions under KAR’s debt documents, click here. For KAR’s covenants tear sheet, click here.
 
Beazer Homes

On Beazer Homes’ recent earnings call, management emphasized that reducing debt is a key aspect of the company’s long-term growth strategy and that it is targeting a net leverage profile of below 5x, a reduction of 1.5x turns on net leverage of 6.5x as of Dec. 31, 2019. Management also stated that the $150 million unsecured term loan - which amortizes in two annual installments of $50 million beginning Sept. 10, 2020, with the remainder due at maturity - provides the company with “a graduated path to really clearly show what debt reduction would look like.”

The company’s revolver generally permits the company to prepay outstanding debt if: (a) it refinances that debt, or (b) it complies with the collateral coverage and minimum liquidity covenants and pro forma revolver borrowings do not exceed $50 million. We estimate that the company meets those requirements as of Dec. 31. However, because the revolver restricts using revolver proceeds to prepay non-revolver debt, the company may use only a fraction of its liquidity to fund any such prepayments. In addition, with $30 million outstanding under the revolver as of Dec. 31, the company will lose access to the revolver’s general prepayments basket if it draws more than an $20 million. As such, the company appears to have little covenant flexibility to permanently reduce any non-revolver debt other than the upcoming $50 million term loan amortization payment. Since Beazer has only $41 million of balance sheet cash as of the recent quarter, even that could prove difficult.

For a summary of the terms and provisions under Beazer’s debt documents, click here. For Beazer’s covenants tear sheet, click here.
 
Reorg Covenants reviewed three issuers that came to market this week for a total of approximately $1.375 billion in bonds: APX Group, Block Communications and Hecla Mining.

Proceeds from all three issuances are being used to repay outstanding debt.

Reorg Covenants analyzed the seven issuers’ senior notes, including pro forma leverage, permitted EBITDA addbacks and the ability of the issuers to incur additional secured debt, transfer assets to unrestricted subsidiaries and pay dividends. We also calculate the issuers’ nonguarantor restricted subsidiaries’ ability to incur structurally senior debt. In each case, we discuss capacity relative to the company’s last 12 months of EBITDA.

Because a portion of the nonguarantor restricted subsidiaries’ debt capacity uses capacity under general debt baskets, such utilization would reduce the issuer’s ability to incur secured debt, and to the extent the issuer transfers assets to unrestricted subsidiaries or pays dividends, such action would reduce the issuer’s capacity to consummate the other. Further, our calculations below assume that absent any explicit language to the contrary, nonguarantor restricted subsidiaries do not incur debt under credit facilities debt baskets and investments in similar businesses do include unrestricted subsidiaries unless explicitly restricted. Finally, we assume issuers, unless explicitly restricted, can incur debt under leverage-based credit facilities baskets prior to incurring debt under fixed basket amounts.

As illustrated below, while APX’s notes provide significantly more flexibility to incur secured debt, Block Communications’ notes provide significantly more flexibility to pay dividends; Block Communications’ and Hecla’s notes provide significant flexibility to transfer assets to unrestricted subsidiaries.