Fri 08/07/2020 05:23 AM
July was busy for the primary high yield bonds market, with both debut and repeat issuers coming to the market as lockdown restrictions were loosened. A trend of successful investor pushback continued, similar to June’s Thyssenkrupp Elevators issuance, showing that investors are paying close attention to covenants. Investors were focused on reducing dilution and priming risk, reducing the amount of value leakage permitted and obtaining stonger credit support, as mentioned in our Recent High Yield Covenant Pushback article. Continue reading for the Debt Explained by Reorg team's analysis of July high-yield bonds, and request access to follow in-depth.

High-Yield Bonds

Following investor feedback during its roadshow, U.K. pub operator Stonegate had to bolster the credit support provided to achieve its “opportunistic” refinancing of bridge and other facilities with a five-year £950 million fixed rate senior secured bond and a five-year €300 million floating rate senior secured bond. While the business model and sponsor was regarded as reputable, there were concerns about recovery in pub attendance numbers, Reorg reported. Stonegate agreed to give additional fixed and floating security, including mortgages over certain freehold property in England and Wales, as discussed in our Updated Covenant Analysis.

On July 24, the £950 million fixed rate tranche priced at par to pay a coupon of 8.25%. The €300 million floating rate tranche priced at 93 with a margin of Euribor+575 basis points.The £950 million fixed rate tranche traded down to 98/99 the same day, Reorg reported.

Another issuer that faced investor pushback was Italian gaming company Gamenet, which launched a dual tranche €640 million five-year senior secured bond to refinance existing debt, including financing used for its acquisition by Apollo.

A wide swathe of covenants were tightened. As highlighted in our Updated Covenant Analysis, amendments included reducing secured debt capacity, reducing dividend capacity, restricting portability to a one-time use, capping the synergies EBITDA add-back, enhancing reporting and removing the equity claw for the floating rate notes. In addition to the amendments, the floating rate tranche was cut by €40 million to €300 million with a commensurate increase in the fixed-rate tranche to €340 million. The floating rate notes priced at 98 with a margin of E+600 bps, while the fixed-rate tranche priced at par with a coupon of 6.25%.

The bond documentation of debut issuer DoValue’s new five-year €265 million senior secured notes contained an immediate and generous flexibility for value leakage to shareholders, the ability to incur €100 million of super senior debt in the future and notably weak guarantees, as highlighted in our Covenant Analysis. The group priced its notes at 98.913 to pay a coupon of 5%, tighter than the originally guided 5.25%.

Bite, a telecommunications group in the Baltics, came to market with a dual tranche 5.5 year senior secured notes offering. Proceeds of the deal, which got upsized by €30 million, are to be partially used to fund payments to its shareholders. The group priced its €400 million 5.5-year fixed rate notes at par to pay a coupon of 4.625%. The €250 million 5.5-year FRNs priced at 99.5 with a spread of 462.5 basis points over Euribor.

A key concern in Bite’s bond documentation could be found in the restricted payments covenant, which includes an aggressive provision stating that transfers of value from unrestricted subsidiaries will not be deemed to be a “direct or indirect” action. This will effectively enable investment capacity to be converted into dividends capacity and could ease value leakage through an unrestricted subsidiary, as explained in our Covenant Analysis.

Earlier in the month, repeat issuer Parts Europe, formerly known as Autodis, launched and priced a new five-year €300 million senior secured bond at par with a coupon of 6.5%. As highlighted in our Covenant Analysis, key concerns for the notes included the loosening of covenants compared to the issuer’s existing 2025 notes, aggressive covenant ratio calculation flexibility including the inconsistent application of IFRS 16, and the immediate capacity for shareholder payments under the build-up basket.

Repeat issuers Intrum and Verisure also returned to the market in July with covenant packages similar to their existing notes. Being able to gauge enough interest, Intrum increased the size of its new 2025 senior unsecured notes to €600 million, from €500 million previously, and priced its notes close to previous guidance at 4.875%. Verisure was also able to upsize its senior secured notes offering to €800 million from earlier guidance of between €500 million and €700 million.

As highlighted in our Covenant Analysis, Intrum’s new notes included new calculation flexibility which could enhance the ability to incur secured debt.

Compared to Verisure’s existing €200 million 2025 floating rate senior secured notes, the Swedish alarm company’s new notes allow for an increased amount of priming debt and value leakage by increasing basket sizes and ratio incurrence test levels in the debt, liens and restricted payments covenants and replacing total assets grower baskets with EBITDA grower baskets and thresholds across the covenants, as mentioned in our Covenant Analysis.

Another repeat issuer, U.S. retail technology group Diebold Nixdorf, launched an offering of $690 million of new senior secured notes due 2025 while its Dutch subsidiary sought to raise €350 million through new senior secured 2025 notes. The dollar tranche size increased by $10 million to $700 million at 99.031 to yield 9.625% with a 9.375% coupon. The €350 million tranche priced with a 99.511 discount to yield 9.125% with a coupon of 9%. As mentioned in our Covenant Analysis, the notes permit significant pari debt and have limited dividend and transfer capacity.

At the end of the month, German pharmaceutical distributor Phoenix Pharmahandel announced the launch of senior unsecured notes by Phoenix PIB Dutch Finance B.V. for the refinancing of existing debt and general corporate purposes. As discussed in our Covenant Analysis, these notes are “high-yield lite” with a very limited negative covenant package.

The covenant package is principally limited to debt and negative pledge covenants. There will be no limit on making restricted payments, sale of assets and the use of proceeds, transactions between affiliates and mergers/sales of all or substantially all assets of the group.

S&P has assigned a rating of BB+ to Phoenix Pharmahandel and a preliminary rating of BB+ to the notes. To read more on covenant erosions observed in double B high-yield credits, see our High-Yield Industry Update on Covenant Risks in Double B HY Credits.
Leveraged Loans

During July, market activity also continued to pick up in the leveraged loan market, with most loans being provided in connection with bolt-on acquisitions and refinancing. Borrowers continued to push for greater flexibility and more aggressive terms.

Aggressive features we have seen in deals during this period included restrictions on MFN protections, including limiting to margin protection only, limiting to debt incurred under specified incremental debt baskets, and inclusion of a maturity condition so that MFN protection does not apply to debt maturing more than a specified period after facility B maturity. At the same time, we also saw that asset disposal prepayment provisions were weakened by the inclusion of a leverage grid and the ability to apply disposal proceeds to fund certain restricted payments. Other off-market features seen this month included 200% RP capacity debt baskets and 200% contribution debt baskets, add-backs for revenue losses attributable to Covid-19, two-year time limits on the declaration of certain events of default following the occurrence of the relevant default, and net short lender provisions.

Loan issuers included Finnish sporting goods company Amer Sports, which priced a €100 million first lien term loan B2 maturing on March 30, 2026 at E+625 bps with a 0% floor. The facility mirrors the group’s existing €450 million 2026 loan, with which it ranks pari passu.

French medical diagnostics business Biogroup LCD launched a €536 million first lien term loan B add-on to its existing April 2026 facility. Proceeds will be used to finance an acquisition and repay €90 million of the revolving credit facility currently drawn for the acquisition of French laboratory services company Dyomedea.

The add-on will pay E+425 bps, the same as the existing loan. The OID the term loan B is at 96-97. Commitments are due on Aug. 10.

Italian healthcare software group Dedalus launched a €240 million add-on to its €680 million term loan B, with proceeds to be used to finance an acquisition. The original seven-year facility pays a margin of E+450 bps. Commitments are due on Aug. 6. Debt Explained’s legal analysts have reviewed Dedalus’ new loan documentation.

Portuguese crop feed specialist Rovensa launched a new seven-year €440 million term loan B. Price talk for the new loan is at 98, with a margin of 450 basis points over Euribor. Commitments are due on Aug. 11. Debt Explained’s legal analysts have reviewed Rovensa’s new loan documentation.

Baking products company Cerelia launched a two-tranche term loan B of €382.5 million and €37.5 million equivalent in dollars to finance its buyout by private equity Ardian. Debt Explained’s legal analysts have reviewed Cerelia’s new loan documentation.

German telecommunications group Freenet issued a refinancing promissory note loan of €345 million. The borrower launched a deal with an initial size of €300 million, but increased it on the back of strong investor demand.

Rotterdam-based bottler Refresco priced a five-year €400 million term loan B at 98.5 with a margin of E+400 basis points. Earlier in the syndication, the group improved the ticking fee spread in its favor at 0 bps, 50 bps and 100 bps from 0 bps, 60 bps and 120 bps.

U.S. data analytics group Nielsen launched a $275 million euro-equivalent fungible add-on to its existing €420 million first lien term loan B, and changed the denomination of the add-on to its 2025 €420 million first lien term loan B to €240 million, from $275 million-equivalent in euros previously. The group priced the facility at 98.75 OID.

French telecommunications group Iliad priced a new €300 million 2026 term loan B at 97 on July 24. The final margin is E+425 bps. Proceeds will be used to buy shares back.

Skyscraper, the BASF construction spinoff, increased the size of its new term loan B by €110 million to €810 million, and priced it at 98 with a margin of E+450 bps. The borrower reduced the size of the second tranche, a €775 million-equivalent in dollars loan, to €675 million-equivalent. This loan was pre-placed. Debt Explained’s legal analysts have reviewed Skyscraper’s loan documentation.

Debt Explained has reviewed loan documentation for Amer Sports, Biogroup LCD, Dedalus, Rovensa, Refresco, Iliad and Skyscraper. Our loans library can be found HERE, while our bonds library can be found HERE.

Market Maker, our bonds database, can be found HERE, while Representative Loan Terms, our loans database, can be found HERE.

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