Primary: Coty Includes Over $500 Million in EBITDA Addbacks for Lost Revenue Due to Covid; New Notes Include Significant Additional 1L Debt Capacity

Coty Inc. is issuing $750 million of senior secured notes due 2026, with proceeds to be used to repay amounts outstanding under the company’s first lien term loan facility. The new notes are expected to price today. The notes will be guaranteed by each domestic restricted subsidiary that guarantees the company’s credit facilities or other debt in excess of $150 million. The notes will be secured on a first lien basis by substantially all tangible and intangible assets of the company and the guarantors.

Notably, the offering memorandum discloses LTM adjusted EBITDA as of Dec. 31, 2020, of $201.9 million, compared with LTM covenant adjusted EBITDA for the same period of $1.281 billion (more than 6x adjusted EBITDA), including “approximately $500 [million]” attributable to “lost revenue and earnings” in connection with the Covid-19 pandemic and certain other addbacks discussed further below.

Coty Inc.’s capital structure as of Dec. 31, 2020, and adjusted for the issuance of the new notes and refinancing of the credit facilities, is summarized below:
   
Coty’s reported LTM Adjusted EBITDA was $201.9 million as of Dec. 31, 2020. However, its LTM reported covenant adjusted EBITDA for that period is more than 6x that amount, $1.282 billion. The below excerpt from the OM shows the adjustments made to reconcile LTM adjusted EBITDA to covenant adjusted EBITDA:
 
The “synergy credit” is likely an adjustment made pursuant to an addback for cost savings. While it is not unusual for companies to include a cost-savings addback, typically they are capped at no more than 25% of EBITDA. The Coty addback is uncapped, however, permitting over $500 million of projected synergies.

Even more unusual is the addback for “[e]xtraordinary and unusual losses due to the effect of the Covid-19 pandemic,” which likely relies on an addback in clause (3) of the definition of “Adjusted EBITDA” for “extraordinary, unusual or non-recurring items.” While many EBITDA definitions include similar addbacks, it is unusual to see them used to capture lost revenue due to Covid-19, as Coty does. Typically where lost revenue is being added back to EBITDA, there is explicit language in the definition authorizing such an addback.

Without the “Synergy Credit” and “Covid-19 impact” addbacks, the company’s secured net leverage ratio would be 16.4x, and its net leverage ratio would be 24.0x. Subtracting just the approximately $500 million of Covid-19-related “lost revenue and earnings,” Coty’s secured net leverage ratio would be 4.2x, and its net leverage ratio would be 6.2x.
 
Coty’s flexibility under the new notes is summarized below. The notes provide significant flexibility for value leakage through dividends or transfers to unrestricted subsidiaries. In addition, the company may incur up to an additional $3.96 billion of first lien debt.
     

• As of Dec. 31, 2020, guarantor subsidiaries represented approximately $1.2 billion of net revenue to third parties from continuing operations, compared with Coty’s total net revenue of $4.2 billion, and long-lived assets of $3.2 billion, compared with Coty’s total assets of $14.2 billion.
   
• The notes include an unusually large annual dividend restricted payment basket, permitting up to $400 million of dividends or stock repurchases annually.
   
• As discussed above, the EBITDA cost-savings addback is uncapped, which is unusual; typically these addbacks are capped at an amount of not more than 25% of EBITDA.

--Jeff Brenner