Relevant Items:
Town Sports Covenant Tear Sheet and Debt Document Summaries
Town Sports Debt Documents
As previously
reported by Reorg, on Dec. 29 Town Sports International Holdings Inc. announced that it had entered into a $100 million first lien delayed draw term loan to be provided by Kennedy Lewis Investment Management (“KLIM”). An unexecuted copy of the term loan agreement dated Dec. 28 was attached to the
release and is available
here.
Continue reading for our Americas Covenants team's analysis of Town Sports new credit facility and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.
Town Sports’ new term loan facility (the “KLIM Term Loan”), which is agented by Alter Domus (formerly Cortland Capital Market Services), provides yet another example of the increasing popularity of direct lending arrangements among public borrowers, especially in the middle market. As previously
discussed by Americas Covenants, direct lending arrangements differ in important ways from bank-led syndicated facilities, which historically have comprised the bulk of the public leveraged loan market, and are generally more protective of lenders with respect to priming debt and value leakage risks.
In this report, we examine some of the key terms of the KLIM Term Loan, including how they compare to those of traditional syndicated facilities as well as other recent direct loans to public companies.
We find that - while the KLIM Term Loan contains most of the features typical of a direct loan - the facility’s lack of financial covenants makes it relatively less protective to lenders when compared with other recent direct loans to public companies, a feature which may be explained in part by KLIM’s dual role as lender and majority shareholder.
Notable Terms Under the KLIM Term Loan
Financial covenants - Unlike many direct lending and syndicated facilities, the KLIM Term Loan does not contain any financial covenants. This deficiency is potentially mitigated, however, by KLIM’s control of the company’s board (as previously reported by Reorg, in connection with the term loan closing, KLIM may appoint three directors to the company’s five-person board).
Elimination of unrestricted subsidiaries - Like many other direct loans to public companies, the KLIM Term Loan eliminates the distinction between restricted and unrestricted subsidiaries commonly seen in syndicated facilities. As many of our readers know, because unrestricted subsidiaries are not subject to negative covenants, assets transferred to unrestricted subsidiaries lay entirely outside the reach of creditors. The KLIM Term Loan addresses this risk by removing the concept of unrestricted subsidiaries and requiring that
all of the borrower’s subsidiaries obey the negative covenants.
Capacity and transfer limitations - Consistent with direct lending trends, the KLIM Term Loan places tight restrictions on the company’s ability to incur or prepay other debt and to make investments and restricted payments, including by not providing the company with negative covenant grower baskets based on the greater of a fixed amount and a percentage of EBITDA or total assets; without grower baskets, the company will be unable to increase its flexibility should it grow EBITDA or total assets.
Debt and liens - Secured debt capacity is limited to $20 million, consisting of $10 million of incremental term loans and $10 million of additional delayed draw term loans that may be committed by PW Partners Capital Management LLC (“PW Partners”) by no later than Jan. 29 in exchange for up to about 4.15 million shares (approximately 5%) of the company’s common stock. (PW Partners is an asset management firm controlled by Town Sports CEO Patrick Walsh.)
Dividends, prepayments, investments - The KLIM Term Loan provides virtually no dividend and restricts prepayments of junior lien, unsecured, and/or payment subordinated debt. General investment capacity is capped at $5 million.
Permitted acquisitions - Unlike most syndicated facilities, which typically contain only light restrictions on acquisitions of entities that eventually become part of the credit group, the KLIM Term Loan caps permitted acquisitions of future loan parties at $10 million per fiscal year.
Intellectual property transfers - Subject to limited exceptions, the asset sale covenant generally restricts the loan parties from transferring material intellectual property to nonloan parties. While not historically typical of syndicated facilities, restrictions on intellectual property transfers have been
appearing in an increased number of bank loans to private equity-backed borrowers.
PIK-like closing fees - The KLIM Term Loan provides for a $10 million closing fee (10% of the closing date commitments) for the benefit of the lenders, which was added to the outstanding term loan principal on the closing date and will begin accruing interest on Dec. 28, 2022. A similar 10% fee will be added to the outstanding term loan principal for the benefit of PW Partners to the extent the company obtains the $10 million of additional delayed draw term commitments by Jan. 29.
Call protection, mandatory prepayments - Unlike most syndicated facilities in the current market, which typically include six-month to two-year call protection between 1% and 2%, the KLIM Term Loan provides four-year call protection according to the following schedule:
- Dec. 28, 2022 - 10.00% plus make whole (calculated at T+ 50bps);
- Dec. 28, 2023 - 10.00%;
- Dec. 28, 2024 - 5.00%; and
- Thereafter - 0.00%.
Notably, the above call protection schedule also applies to prepayments of the portion of term loan principal consisting of the 10% closing fees awarded to KLIM and/or PW Partners in connection with their commitments.
Protection against superpriority uptier exchanges - Despite the attention that priming lien transactions like Serta Simmons and TriMark have received in 2020, most syndicated facilities still do not expressly prohibit amendments that subordinate lenders’ liens to those of other creditors without the consent of each affected lender. Many direct loans consummated in 2020, however,
do expressly prohibit such amendments and are therefore more protective of lenders’ liens. Consistent with this trend, the KLIM Term Loan prohibits lien subordinating amendment without affected lender consent.
--Julian Bulaon