December Primary Markets Sees Proceeds Earmarked for Refis, Looser Covenant Packages; New Provisions to Curb Investor Ability to Vote Emerge; Overview of Covid-Era Bankruptcies, 2020 Covenant Trends

Editor's note: On Dec. 1, Debt Explained became EMEA Covenants by Reorg. This report charts key covenant trends and activity in Europe in December. If you would like access to any of the reports mentioned, please email questions@reorg.com. Scroll to the bottom to see what podcasts and webinars we produced this month on covenants or access them HERE on the Reorg Media Page.

Closing out a unique and challenging year, December saw a number of repeat bond issuers coming to investors with offerings of new notes and looser covenant packages. The primary market saw six new issuances in Europe (excluding private placements, add-on offerings and the like).

Nearly all of the issuances were aimed at refinancing existing bonds. BC Partners-backed Italian machinery maker Industria Macchine Automatiche (IMA), despite being a debut issuer, included a number of sponsor-friendly provisions in its senior secured notes package.

Risk of value leakage through loose restricted payments covenants was a common theme. In the case of WeBuild, the Italian construction group, the restricted payments covenant in its senior notes allowed for the build-up basket to be accessed during an event of default grace period due to the lack of a default stopper. Similarly, the restricted payments covenant for French retailer Casino Guichard-Perrachon SA’s senior unsecured notes did not include a default stopper for investments.

A generous starter amount was included in the build-up basket for the new senior secured notes offered by Encore Capital Group and our legal analysts noted that the new issuance of senior subordinated notes by House of HR also allows for amounts accrued under the build-up basket from Jan. 1, 2019, to be available from the date of issue and further flagged that investors should seek clarification of the amount available. Meanwhile, ContourGlobal’s new senior secured notes quadrupled the size of both the general restricted payments basket and the general investments basket.

Not only did issuers improve their ability to make restricted payments but also expanded other aspects of the high-yield covenant package. Debt incurrence capacity was improved by ContourGlobal and Casino while IMA included substantial capacity for dilutive debt through a dividend-to-debt toggle and an expansive credit facilities basket. On a pro forma basis, Encore’s new bondholders will be sitting behind more than one turn of leverage in super senior debt and additional structurally senior debt will be allowed through permitted purchase obligations and securitization SPVs.

Our legal analysts examined a newly emerged “voting cap” provision in Ancestry’s bonds that has the potential to limit the voting power of an individual noteholder or noteholder group. The provision made its first appearance in the U.S. market in the notes issued in connection with Blackstone’s acquisition of Ancestry.com. As described further in our report, the provision is more nuanced than it might appear at first glance but, like net short provisions, represents a departure from “one dollar, one vote” and an erosion of investor’s rights. Read our full in-depth analysis HERE.

We provided an update to our analysis of the Bombardier/Alstom transaction in response to news that all regulatory approvals had been received for the purchase and sale of Bombardier Transportation. The Canadian business jet and train manufacturer is likely to use part of the net proceeds it receives to pay down new secured debt. Our analysis of the expected proceeds can be found HERE.

On the back of yet another acquisition announcement by EG Group, our legal analysts looked at how much capacity the group has under its current bond documentations to raise secured debt to finance such acquisitions. In December, the group announced it would be buying 285 petrol stations in Germany from OMV and there were reports that it might buy all or some of Asda’s petrol stations. The legal and financial analysis of EG Group’s secured debt capacity can be found HERE.

In a Bankruptcy Industry Update, legal analyst Shan Qureshi provided an overview of 11 large, non-consensual pandemic era refinancings that used the English law scheme of arrangement and the Part 26A Restructuring Plan in 2020. The overview, available HERE, details how debt was extinguished or wiped out and new debt introduced by debtors since March 2020.

We continued our Covenants Conversations podcast in December with Head of EMEA Covenants Shweta Rao discussing leveraged finance covenants with partners from the law firm Milbank. Alexandra Grant and Rebecca Marques were guests on the podcast that discussed how the pandemic has impacted leverage finance documentation, key covenant developments, the rise of ESG, and what 2021 might bring.

On Dec. 9, we hosted a webinar with the European Leveraged Finance Association (ELFA) to bring together a panel of experts to reflect on a uniquely volatile year in the markets in 2020. Moderated by Julie Miecamp, Managing Editor, Europe at Reorg, the panel discussed how investors reacted to the volatility and their focus when considering credits.

In our special end-of-year edition podcast, each branch of our editorial trifecta - legal, credit and news - joined together to provide highlights from 2020.

Our webinars and podcasts are available on the Reorg Media Page. You can also subscribe to our podcasts on SoundCloud, iTunes and now Spotify.

Our weekly Coronavirus Impact Recaps can be found HERE, while our Covenants Weekly Recaps can be found HERE.

Our RCF tracker, which is updated every week with new information and new borrowers, can be found HERE. We recently upgraded the RCF tracker to include two new columns setting out (1) whether the RCF is secured or not and (2) the ranking of the RCF in relation to the issuer’s outstanding bonds.

This tracker aims to provide an overview of performing and stressed companies which have revolving credit facilities alongside bonds in their capital structure. The tracker includes the committed and drawn amounts of RCFs, as well as the corresponding financial covenants.