December Covenants Monthly: Primary Market Sees Final Flurry of Deals; Adler Group Restructuring Hits Bump in the Road and Telepizza Needs Cash; An Analysis of Debt Buybacks and What Constitutes ‘Substantially All Assets’ under New York law; European High-Yield Covenants Pushback Tracker: EBITDA Adjustments

December 2022 saw the year end in a very different mood than when it began. In January, about €9.8 billion of high yield bonds and €20.9 billion of leveraged loans came to market. Granted, that was about half of the new issuance volume in January 2021, as even then the market was starting to get a case of the jitters. Then came the war in Ukraine, rising inflation and interest rates and by December things looked considerably more bleak. Total new bond issuance for the month was at €1.9 billion and loans were at €3.4 billion, and even that was considered relatively active compared to the preceding few months.

The decline in volume only tells part of the story, however. Debut issues are essentially gone from the market, with only seasoned issuers putting their heads above the parapet, principally to refinance existing debt. Bond yields are frequently in double digits. Aggressive covenant terms still feature, but many issuers are opting to keep largely with what was in their previous deals to avoid a difficult marketing process. And debt buybacks and asset sales are options that companies are actively exploring to deal with their problems.
 
Stressed Credits Analysis

Adler Group

Distressed German real estate company Adler Group asked holders of €3.2 billion of its unsecured non-convertible notes to consent to the incurrence of €937.5 million of new senior secured debt to help repay debt maturing in 2023 and 2024. Adler reported that it had the support of more than 75% (the requisite amendment threshold) of holders of three of the six series of notes, but a group representing more than 34% of the unsecured notes due 2029 was objecting to the proposals, and the proposals needed to be approved by each series of noteholders.

We examined the proposals in detail in our legal analysis available HERE, noting that the holders of the 2029s may well hold a blocking position. Following publication of our report, Adler announced that while 78% of all the bondholders participating in the consent process approved the changes, only 57.7% of participating holders of the 2029s did. Accordingly, Adler now plans to use an alternative method to implement the changes, such as a U.K. restructuring plan, company voluntary arrangement or a German StaRUG process, in order to cram down the objecting 2029 holders. All of these alternatives are examined in our legal analysis. We will continue to monitor the situation as it develops.

Telepizza

Spanish pizza franchise Food Delivery Brands (fka Telepizza) is looking to restructure, having appointed advisors in November to evaluate potential options for its capital structure. Its owner, KKR, is reported to have proposed a 75% haircut to bondholders in exchange for providing additional equity. Bondholders obviously are not happy about that, at least not the 75% haircut. In any event, Telepizza needs to do something as it may run out of cash in the third quarter of 2023 according to our cash flow model. KKR is also reportedly considering a sale of Telepizza following a refinancing. If that happens, it may trigger a change of control put at 101% under the bonds (assuming they are still outstanding and the leverage-based portability feature is not met). Our change of control analysis for Telepizza is available HERE.

Performing Credits Analysis

Neptune Energy

Italian energy company Eni is reported to be interested in acquiring Neptune Energy, the London-listed oil and gas explorer. This raises the question whether that might trigger the change of control clause in Neptune Energy’s bonds, forcing it to offer to repurchase them at 101%. However, the change of control clause in the bonds has a ratings downgrade double trigger, which may make a noteholder put option less likely. See our change of control analysis for Neptune Energy HERE.
 
The European high yield bond market saw a brief flurry of life in December before closing for the holiday period. In keeping with the tone of the market for most of the year, only seasoned issuers were willing to brave current conditions and few were willing to risk the marketing process by bringing in new aggressive terms. All of the bonds were used to refinance existing debt, including acquisition debt, with one (Iliad) also for general corporate purposes.

Of the four bonds coming to market, one (888 Holdings) was a tap issue with no new covenant terms (although the covenants in the original bond were reasonably aggressive), one (Intrum) had only minimal changes and one (Iliad) was high-yield lite, with almost no covenants to change. This left one (House of HR) to bring an aggressive covenant package to the market. The fact that it upsized by more than a third during marketing indicates that there is still demand (albeit at a yield of more than 10%) for the right credit, despite the covenant terms being offered.

Intrum

Swedish credit management company Intrum priced €400 million senior notes due 2028 to yield 10% - the tighter end of initial price guidance. The terms of the 2028s are substantially similar to those of the existing 4.875% senior notes due 2025 issued in August 2020, except that the fixed amounts of most baskets have increased to reflect the increase in EBITDA since the 2025s were issued and increased calculation flexibility was added. Neither of these changes are particularly controversial, though.

888 Holdings

Gambling group 888 Holdings priced a €335 million (upsized from €200 million) tap of its existing senior secured fixed rate notes due 2027 and senior secured floating rate notes due 2028.  There were no material changes to the covenant terms between these new add-on notes and the existing 2027s and 2028s. Note, however, that when marketed in July, the original issuance of €400 million fixed rate notes due 2027 and €300 million floating rate senior secured notes due 2028 faced significant investor pushback, with investors focussing on reducing the scope for value leakage, debt incurrence and to curtail calculation flexibilities (discussed on our EMEA podcast HERE).

Iliad

France-based telecoms operator Iliad priced its €750 million senior unsecured notes due 2027. The notes are high-yield lite and do not have traditional high-yield covenant restrictions on incurring unsecured debt, making restricted payments or investments, asset sales or the use of proceeds from asset sales. The notes are unsecured, are not guaranteed by any of the issuer’s subsidiaries and have a weak negative pledge that only applies to the issuer and certain of its subsidiaries. Our covenant analysis on Iliad’s senior unsecured notes is available HERE.

House of HR

The most aggressive covenant package of the month appeared when Belgian human resources company House of HR returned to the market, pricing €415 million of senior secured notes due 2029 (upsized from €300 million) to yield 10.5%. The issuer had attempted to raise €425 million in September in connection with its acquisition by Bain Capital, but the offering was placed on hold and a bridge facility (to be repaid with the proceeds of the notes) was used instead.

The notes feature a higher amount of capacity to prime bondholders, pay dividends, and transfer assets to unrestricted subsidiaries compared to European market average ‘‘Day 1’’ capacities for 2022. The biggest risk comes from the potential for value leakage, which is high by market standards and exacerbated by the presence of off-market features, including a leveraged loan style ‘‘Available Amount’’ basket, as well as the absence of the customary 2x FCCR condition to access the CNI builder basket. Our covenant analysis on House of HR senior secured notes due 2029 is available HERE.

A summary table of bonds launched in December is below: