Thu 10/15/2020 10:53 AM
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2028 Notes Core Analysis

United Natural Foods Inc. announced that it is issuing $400 million of senior unsecured notes due 2028 (the “2028 Notes”) with proceeds to be used, together with ABL borrowings, to repay debt under the company’s senior secured term loan facility.

The company’s capital structure as of Aug. 1, adjusted for the issuance of the 2028 Notes, is illustrated below for reference.

Notable issues under the 2028 Notes include:
  • Potentially unintended debt reclassification - The 2028 Notes include a secured credit facilities debt basket not to exceed (i) the greater of $2,700 million and, in respect of debt under any ‘Borrowing Base Facility,’ the borrowing base, plus (ii) $2,430 million, plus (iii) additional amounts in compliance with a 3.75x secured leverage ratio.

    Although outstanding debt under the senior secured credit facilities at issuance is deemed incurred under the credit facilities debt basket and may not be reclassified, there is no restriction on attributing such outstanding debt as having been incurred under the leverage-based basket, rather than the fixed baskets.

    At issuance, not only can United Natural meet the 3.75x secured leverage test, it can also incur an additional $224 million of debt under the test.

    The result of this is that all outstanding debt under the senior secured credit facilities can be attributed to the 3.75x secured leverage test with United Natural permitted to incur $5,354 million of additional debt under the credit facilities debt basket.

    In addition, although “Borrowing Base Facility” is defined to only include borrowing base revolving facilities, the $2,700 million component is not limited to Borrowing Base Facilities and capacity under that component can be used to issue new first lien secured notes or additional first lien term loans.
  • IP transfers to unrestricted subsidiaries - The 2028 Notes provide that:

Notwithstanding any basket or exception in this ‘Limitation on restricted payments’ covenant or the definition of Permitted Investments that would otherwise permit any contribution, sale, assignment, transfer or other disposition or investment of any intellectual property to or in any Unrestricted Subsidiary, this ‘Limitation on restricted payments’ covenant shall prohibit such contributions, sales, assignments, transfers, dispositions or investments of intellectual property, except for in the case of intellectual property that in the reasonable business judgment of the Company is immaterial to, or no longer used in or necessary for, the conduct of the business of the Company or any Restricted Subsidiary” (emphasis added).

Although the IP transfer restrictions acknowledge that such transfers can be done using capacity under the Restricted Payments covenant and through the definition of Permitted Investments, as highlighted above, the IP transfer prohibition only applies to baskets under the Restricted Payments covenant, not baskets under the definition of Permitted Investments.

While there may be an argument that, in this context, the “notwithstanding any basket or exception” could also capture Permitted Investments, at best, it’s not clear that that’s the case.

As of the issue date, International Distributors Grand Bahama Ltd. and Wetterau Insurance Co. Ltd. are unrestricted subsidiaries.
  • Asset sale sweep - There is no requirement that, to the extent asset sale proceeds are used to repay outstanding revolving debt, revolving commitments are correspondingly reduced.

    While this is not unusual when a company has an ABL facility, there is no requirement that United Natural must only have an asset based revolving credit facility.

    In addition, proceeds from sales of the retail and other nonwholesale business and the tobacco business, in each case, of Supervalu Inc. and its subsidiaries are not subject to the asset sale sweep and could be used to fund permitted dividends or investments.

A comprehensive report on the 2028 Notes is available HERE.
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