Embecta Corp.
Primary: Material IP Transfer Prohibitions Under Embecta’s New Secured Notes Offset With Significant Expansion of 1L Debt Capacity Through Reclassification; Notes May Not Be Redeemed Prior to 2027
Wed 03/23/2022 12:30 PM
Relevant Items:
2030 Notes Core Analysis
Embecta Corp., a manufacturer of medical devices for diabetes management, plans to sell $200 million of eight-year secured notes (the “2030 Notes”) to support its spinoff from Becton Dickinson.
The record date for the spinoff was Tuesday, March 22, with trading of Embecta common to commence April 1.
Embecta’s capital structure as of Dec. 31, 2021, pro forma for the spinoff, is illustrated below:
The 2030 Notes will be secured on a pari basis with debt under the company’s senior secured term loan and revolving credit facility and with its 5% senior secured notes due 2030 issued earlier this year.
If the spinoff is not consummated by Aug. 5, 2022, the 2030 Notes will be subject to a special mandatory redemption at 100%.
A comprehensive report on the 2030 Notes is available HERE.
Embecta’s flexibility to incur additional pari debt and structurally senior debt, transfer assets to unrestricted subsidiaries and pay dividends under the 2030 Notes is illustrated below:
Prominent issues under the 2030 Notes include:
As a result, the issuer can likely use asset sale proceeds to fund permitted “Restricted Payments” or “Permitted Investments” without having to use any such proceeds to repay outstanding debt or to reinvest in the business.
The following table summarizes the presence of certain material holder protections and material aggressive terms included in the 2030 Notes:
2030 Notes Core Analysis
Embecta Corp., a manufacturer of medical devices for diabetes management, plans to sell $200 million of eight-year secured notes (the “2030 Notes”) to support its spinoff from Becton Dickinson.
The record date for the spinoff was Tuesday, March 22, with trading of Embecta common to commence April 1.
Embecta’s capital structure as of Dec. 31, 2021, pro forma for the spinoff, is illustrated below:
The 2030 Notes will be secured on a pari basis with debt under the company’s senior secured term loan and revolving credit facility and with its 5% senior secured notes due 2030 issued earlier this year.
If the spinoff is not consummated by Aug. 5, 2022, the 2030 Notes will be subject to a special mandatory redemption at 100%.
A comprehensive report on the 2030 Notes is available HERE.
Flexibility Under the 2030 Notes
Embecta’s flexibility to incur additional pari debt and structurally senior debt, transfer assets to unrestricted subsidiaries and pay dividends under the 2030 Notes is illustrated below:
Prominent Issues Under the 2030 Notes
Prominent issues under the 2030 Notes include:
- Material IP transfer prohibitions - The 2030 Notes prohibit the issuer and the restricted subsidiaries from selling, transferring “or otherwise dispos[ing] (including pursuant to an Investment)“ of material IP to unrestricted subsidiaries; although the prohibitions do not explicitly include unrestricted subsidiary designations, because the 2030 Notes provide that unrestricted subsidiary designations “will be deemed to be an Investment,” the prohibitions likely extend to designations of material IP-owning subsidiaries as unrestricted subsidiaries.
Nevertheless, the prohibitions would be significantly stronger if they explicitly prohibited designations in addition to transfers.
- Reclassification mechanics significantly expand pari secured debt capacity - The 2030 Notes’ credit facilities debt basket permits pari secured debt not to exceed $2.150B, plus the greater of $500 million and 100% of EBITDA, plus additional amounts in compliance with a 3.1x first lien leverage ratio.
Although the $950 million of outstanding term loans under the issuer’s credit facilities are deemed incurred under the credit facilities debt basket on the spinoff date, not only is there is restriction on the issuer reclassifying all such debt after the spinoff date, but there is also prohibition of classifying such debt as having been incurred under the 3.1x first lien leverage component.
Because the issuer’s first lien leverage at issuance is expected to be 2.8x, it will be able to classify its outstanding term loans as having been incurred as ratio-based credit facilities debt and, as a result, will not have reduced capacity under the $2.150B component of the basket.
- Circumventing the asset sale sweep through funding dividends, investments with asset sale proceeds - Clause (8) to the exceptions of the definition of “Asset Disposition” permits:
“[A]sset sales, the proceeds of which are used to make such Restricted Payments or Permitted Investments.”
As a result, the issuer can likely use asset sale proceeds to fund permitted “Restricted Payments” or “Permitted Investments” without having to use any such proceeds to repay outstanding debt or to reinvest in the business.
- Limited guarantor coverage - At issuance, the subsidiary guarantors will only account for approximately 59% of pro forma EBITDA of the issuer and its restricted subsidiaries.
- Prohibition on redemptions - Prior to [ ], 2027, Embecta is not permitted to redeem the 2030 Notes; the 2030 Notes do not include make whole or equity clawback mechanics.
- Lien subordination, release amendments - Amendments that subordinate or release the liens on the collateral require consent from 66⅔% of noteholders.
- Leverage ratio calculations - Leverage ratios are tested net of all unrestricted cash, and EBITDA addbacks include uncapped cost savings and incremental contract value, with a 36-month look-forward period for actions taken, committed to be taken or expected to be taken.
First lien and secured leverage ratios only include debt secured by liens on the collateral.
Holder Protections, Aggressive Terms Under the 2030
The following table summarizes the presence of certain material holder protections and material aggressive terms included in the 2030 Notes:
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