Mon 04/04/2022 15:33 PM
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Elanco Animal Health Covenant Analysis:

Relevant Items:
Covenant Tear Sheet, Debt Document Summaries
Elanco Animal Health Debt Documents

Elanco Animal Health Inc. offers products in two primary categories: pet health (focused on parasiticides, vaccines and therapeutics) and farm animals (focused on products designed to prevent, control and treat health challenges in cattle, poultry and swine).

Elanco completed its IPO in September 2018 with former owner Eli Lilly owning 80% of Elanco’s common stock. In March 2019, Eli Lilly disposed of its stock in Elanco through an exchange offer and, as a result, no longer owns any voting or economic interest in Elanco.

Elanco has made several key acquisitions since then.

In August 2020 it acquired Bayer Animal Health in a transaction valued at almost $7 billion, expanding the company’s presence in retail channels for pet products. Elanco paid the majority of the cash consideration with the proceeds of a $4.275 billion term loan B.

In August 2021 it acquired biopharmaceutical company Kindred Biosciences Inc. for $444 million, advancing the company’s opportunities in the pet dermatology market. Elanco paid for this acquisition using its revolving facility and cash on hand.

The company’s most recent development is the March 29 commencement of a tender offer to purchase up to $250 million of senior notes due 2023. Holders who tender their notes prior to the early tender time on April 11, 2022, will be eligible to receive $1,035 per $1,000 principal amount of notes tendered, which includes an “Early Tender Payment” of $30 per $1,000 of the notes, according to the release.

Elanco’s capital structure as of Dec. 31, 2021, the end of its 2021 fiscal year, is shown below.


Covenant Conclusions

  • Financial covenants - There are two financial covenants in the credit agreement, both of which benefit only the revolving lenders:

    • The total net leverage ratio may not exceed 7.71x; and

    • The interest coverage ratio may not be less than 2x.

As of Dec. 31, 2021, the company was in compliance with both covenants, with a total net leverage ratio of 5.5x and, using the net interest coverage ratio as a proxy, an interest coverage ratio of 4.5x. (Although the company does not disclose gross interest expense, it did report being in compliance with both financial covenants as of Dec. 31.)


  • Debt and lien capacity - The credit agreement permits incremental loans or incremental equivalent debt in an amount equal to the greater of $1.2 billion and 100% of EBITDA, plus additional amounts as long as:

    • For pari debt: The first lien net leverage ratio is not greater than 3.16x;

    • For junior lien debt: The secured net leverage ratio is not greater than 3.41x; and

    • For unsecured debt: Either the interest coverage ratio is not less than 2x or the total net leverage ratio is not greater than 5.51x.

As of Dec. 31, the company cannot meet the thresholds for incurring additional first lien or junior lien secured debt, but it can incur unsecured debt. In addition, it likely has only $700 million of the fixed capacity remaining, as the first lien ratio basket did not have capacity to incur the $500 million incremental term loan in August 2021.

Ratio debt can be incurred using the same thresholds. General debt and lien baskets for the greater of $300 million and 25% of EBITDA complete the company’s secured debt capacity. Together, these baskets provide Elanco with the ability to incur $1 billion of additional first lien debt, plus unsecured debt until the interest coverage ratio hits 2x. The total amount of additional debt is limited to $2.386 billion by the leverage ratio maintenance covenant.

The senior notes do not contain a debt covenant but do contain a liens covenant. This covenant restricts the ability of Elanco and its restricted subsidiaries to incur liens on “Principal Property,” defined as any building, structure or other facility together with the underlying land and its fixtures, used primarily for manufacturing, processing or production, owned in the U.S. with a net book value over 2% of consolidated net tangible assets (about $62 million as of Dec. 31).

The main exception in the notes permits such liens in an amount equal to 15% of consolidated net tangible assets, which equaled $462 million as of Dec. 31. Note that because the credit agreement collateral includes certain real property, some of this capacity is likely being used by the credit agreement.

  • Structurally senior debt - Under the credit agreement, nonguarantor ratio debt is limited to the greater of $300 million and 25% of EBITDA. Nonguarantors also have a dedicated debt basket equal to the greater of $240 million and 20% of EBITDA and can incur additional debt using the general debt basket and the $500 million of capacity remaining in a $2 billion basket permitting, but not limited to, the senior unsecured notes. The maximum amount of allowed structurally senior debt is therefore $1.34 billion.

  • Restricted payments, investments - The credit agreement’s restricted payments covenant, which applies only to dividends, distributions and equity repurchases, permits such payments as long as the total net leverage ratio is not greater than 4.26x. The company does not currently meet that ratio, but it can still make restricted payments using a general basket for the greater of $300 million and 25% of EBITDA, a cumulative credit basket with a starter amount equal to the greater of $420 million and 35% of EBITDA, and a basket for making annual dividends equal to 7% of market capitalization. The market capitalization basket is particularly significant, as it provides $885 million per year of capacity, given the company’s current market capitalization of $12.637 billion.

    Elanco also cannot meet the threshold for unlimited investments - a 4.51x total net leverage ratio - but can make unlimited investments in all restricted subsidiaries, including nonguarantors. Without the leverage-based basket, it can still make investments using a general basket equal to the greater of $600 million and 50% of EBITDA and with baskets for investing in joint ventures, similar businesses and unrestricted subsidiaries that provide an additional $600 million of capacity. In addition, although the investment covenant is separate from the restricted payments covenant, there is a basket permitting investments to be made using any available RP capacity, a type of basket discussed in more detail HERE.

    Taken together, the credit agreement permits Elanco to pay at least $1.605 billion of dividends or at least $2.805 billion of investments.

  • Senior note purchases - The credit agreement only restricts the company’s ability to repay, redeem or repurchase subordinated debt, so the company is not limited from prepaying or repurchasing senior debt, including the outstanding notes.

–Alisha Turak
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