Thu 07/15/2021 14:00 PM
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Relevant Items:
Debt Document Summaries
Draft Amendment to Term Loan
Draft Amendment to ABL Facility

Clayton, Dubilier & Rice-owned Core & Main Inc., a specialized distributor of water, wastewater, storm drainage and fire protection products, launched the road show for its IPO on Wednesday, July 14, with expected IPO pricing to be $20 to $23 per share. The company filed its initial registration statement on May 21 and subsequently filed four amendments. Following the IPO, Clayton, Dubilier & Rice is expected to retain majority ownership of the company. Continue reading for our Americas Covenants team's discussion of the Core & Main dividends and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.

Core & Main disclosed that in connection with the upcoming IPO it will redeem all of its outstanding senior notes and amend its term loan and ABL facilities. A draft of the term loan amendment was filed with the third amendment to the registration statement, and a draft of the ABL amendment was filed with the fourth amendment. Full summaries of the drafts are available HERE.

Core & Main’s debt as of May 2, adjusted for the IPO, is shown below.

 
Proposed Term Loan Amendment

The proposed first draft to the term loan establishes a new $1.5 billion tranche B term loan that would refinance the existing term loan in full and increase the overall term loan amount. Under the term loan, IPO proceeds cannot be used to incur debt or make restricted payments; according to the registration statement, IPO proceeds would be used to redeem all outstanding notes and then for general corporate purposes.

The term loan, as amended, would contain a number of aggressive provisions, as summarized in the below table:

 

  1. Asset sale sweep step-downs: While the amended term loan does contain mandatory asset sale prepayment provisions, the requirement to use 100% of the net cash proceeds decreases to 50% if the net secured leverage ratio is not greater than 3.25x and steps down to 0% if the net secured leverage ratio is not greater than 2.75x. In addition, no prepayments are required until the net cash proceeds exceed the greater of $80 million and 5% of tangible assets in the aggregate, unless other pari debt so requires. The reinvestment period for asset sale proceeds is a long 720 days, with a 180-day extension for committed proceeds.

  2. Aggressive MFN protection: The 75 bps MFN provision in the amended term loan is very limited. It applies only to loans incurred pursuant to the ratio basket of the incremental amount that are syndicated, floating rate, first lien incremental term loans with a principal amount over the greater of $200 million and 50% of EBITDA that have a stated maturity that is earlier than 12 months following the term loan maturity date. This limited MFN is also subject to a 12-month sunset from the date of the first amendment and does not apply to loans incurred in order to finance or refinance any acquisition or other investment.

  3. Debt using RP capacity: Not only does the amended term loan permit the company to incur debt equal to twice the amount of specified restricted payment capacity, it also permits all such debt to be secured.The term loan also permits contribution debt equal to 200% of cash contributions and proceeds from equity issuances; all such debt is also permitted to be secured.

  4. Earlier maturing debt: The amended term loan would permit earlier maturing debt in an amount equal to the greater of $200 million and 50% of EBITDA.

  5. Post-IPO restricted payments - Many credit agreements, particularly private sponsored credit agreements, include annual post-IPO dividend baskets based on a percent of proceeds received, a percent of market capitalization or both.The term loan’s post-IPO basket permits annual “Restricted Payments” not to exceed 7% of proceeds received, plus 7% of market capitalization. Because the term loan is drafted like a high-yield bond and defines “Restricted Payments” as dividends, equity buybacks, prepayments and restricted investments, in addition to dividends, the term loan’s post-IPO basket can also be used for investments, including transfers to unrestricted subsidiaries.Importantly, although the term loan prohibits proceeds from the IPO to be used to incur contribution debt or, through the builder basket, to pay dividends or make investments, the proceeds can be used under the post-IPO Restricted Payments basket.

  6. Indenture-style investments covenant: The amended term loan contains a single covenant covering both restricted payments and investments, which is more typical in indentures, and does not limit the amount of investments that can be made from guarantor restricted subsidiaries to nonguarantor restricted subsidiaries. To the extent collateral assets are transferred to nonguarantor restricted subsidiaries, the liens on those assets will be automatically terminated.

  7. Pro rata and subordination amendments: Amendments to the pro rata sharing provisions only require the consent of the required lenders, rather than all affected lenders; this could allow the borrower to consummate coercive exchange transactions similar to those consummated by J.Crew and PetSmart. In addition, amendments that result in lenders’ liens being subordinated also likely only require consent from a majority of lenders. Because the company is permitted to purchase the term loans in the open market, the company would likely be able to participate in a superpriority uptier exchange similar to those previously consummated by Serta Simmons, Boardriders and TriMark.Interestingly, while the term loan had already permitted Core & Main to purchase term loans pursuant to non-pro rata open market purchases, the amendment enhanced the company’s company’s ability to purchase the term loans by permitting it to also purchase the term loans pursuant to “other privately negotiated” purchases.

  8. Automatic collateral release: A provision added to the term loan provides that:


“[T]he Collateral Agent may, in its discretion, release the Lien on Collateral valued in the aggregate not in excess of the greater of $40,000,000 and 2.50% of Consolidated Tangible Assets in any fiscal year without the consent of any Lender” (emphasis added).

This is highly uncommon and, without any consent from the term loan lenders, may result in an annual reduction in the collateral value.

Proposed Term Loan Flexibility

Core & Main’s proposed flexibility under the amended term loan, which governs its ability to incur additional first lien debt, make investments, including transfers to unrestricted subsidiaries, and pay dividends, is illustrated below.

 
Proposed ABL Amendment

The proposed third amendment to the ABL facility would increase the commitments by $150 million to a total of $850 million. Although the ABL amendment is generally less aggressive than the term loan amendment (as shown in the table below), it proposes limiting the liens covenant to restrict only liens on ABL priority collateral (and, as a result, allowing all permitted debt to be secured on a pari basis with the first lien term loans), providing for a 21-business-day equity cure period for the springing 1x fixed charge coverage ratio and adding similar automatic collateral release language as the term loan, but for the greater of $15 million and 1% of tangible assets. The ABL also permits the company (including its nonguarantor restricted subsidiaries) to incur unlimited, unconditional unsecured debt.

--Alisha Turak
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