Fri 03/05/2021 03:07 AM
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The robust primary market in January was followed by a number of blockbuster deals in February. In line with the previous month, we saw looser covenant packages in refinancings and bespoke flexibilities included in bond documentation.
 
“Largest Ever” Blockbuster Deals

In February, three issuers came to market with offerings of over €1 billion, of which two were over €2 billion.

Bottle and beverage cans manufacturer Ardagh Metal Packaging launched a four-tranche green financing bond of approximately $2.8 billion equivalent in senior secured notes due 2028 and senior unsecured notes due 2029. Proceeds from the offering will be used primarily to provide the cash consideration for the carve-out of Ardagh’s metal packaging business. Reuters reported the offering as the largest ever green bond.

This deal also brought the special purpose acquisition company, or SPAC, trend across the Atlantic. Ardagh contemplates a business combination with a SPAC in connection with the spin-off transaction.

In the largest ever sterling bond offering, according to the Financial Times, U.K. supermarket chain Asda offered £2.25 billion senior secured notes due 2026 and £500 million senior notes due 2027 as part of the financing package to fund the purchase of Asda by TDR Capital and the Issa brothers.

IQVIA, a U.S.-based provider of information technology and contract research services to the healthcare industry, also issued a benchmark deal of €1.45 billion of senior unsecured notes in two tranches due 2026 and 2029 with the net proceeds to be used to refinance the group’s existing senior notes.
 
Repeat Issuers Achieve Looser Covenants; Bespoke Covenant Flexibilities Also Seen

Several repeat issuers came to market in February for refinancing and general corporate purposes and were able to clear the market with looser covenant packages than prior issuances. A number of bespoke covenant provisions were also seen in February high-yield issuances.

The notes issued by Asda allow value leakage through bespoke provisions, permitting the owner to extract specified assets, an off-market standalone subordinated debt repayment basket with no default blocker and extensive additional sale-and-leaseback capacity (for gross proceeds of up to £350 million). Meanwhile, Kloeckner included a ratio-based investment basket - which had not till then cleared the market in European high yield - allowing any investment subject to 5.7x net leverage being met or not made worse. This “or not made worse” allowance is off-market and in the past investors negotiated it out.

Sounding a protective note, the notes issued by Asda, along with the new notes issued by Iceland Foods, both included J.Crew blocker provisions. While this is a positive development for both the investors in these retailers’ bonds, the J Crew blockers were not watertight in preventing the leakage of valuable material assets, as we explained in our primer.

The new notes issued by IQVIA were high-yield lite, in line with the existing notes being refinanced, containing restrictions on liens and sale and leaseback transactions only. Even in the context of the high-yield lite covenant package, IQVIA was able to improve the terms of the new notes compared to the existing notes by increasing the general liens basket and increasing the threshold in the cross default/acceleration event of default and the final judgement event of default.

U.K.-headquartered flooring products manufacturer Victoria issued €350 million senior secured notes due 2026 to partially refinance its 5.25% senior secured 2024 notes and for general corporate purposes, including acquisitions. While the covenant package of the new notes is largely similar to the existing 2024 senior secured notes, our legal analysts flagged that the new notes include significant capacity for collateral dilutive debt and the potential for uncapped recourse receivables financings.

The new £250 million offering of senior secured notes due 2028 by Iceland Foods, the U.K. frozen foods retailer, have a looser covenant package overall as compared to its senior secured notes due 2025. The new notes have more capacity for priming debt and value leakage. Uncapped sale/leasebacks are permitted and a new £35 million starter amount in the build-up basket and a new local facilities debt basket, are some of the features of the 2028s.

German packaging group Kloeckner Pentaplast issued €400 million of five-year senior secured notes alongside €325 million of 5.5-year senior unsecured notes to refinance existing debt, including its parent’s structurally subordinated PIK notes. The new notes feature a number of aggressive off-market terms, including the ratio-based investments basket mentioned above. Overall, the covenant package for the notes is loose on protecting against value leakage. Further, portability is set at 6.2x, which is within easy reach of the 6.21x net leverage ratio as calculated by Reorg.

The graph below shows the January, February and second-half of 2020 averages of our Flexibility Scale providing day one capacity available on issue (aggregating “general purpose” baskets only).
 
 
Secondary Coverage

Our secondary coverage in February reflected a diverse range of corporate events and announcements in the leveraged finance market, from a potential IPO to ongoing restructuring efforts.

Prior to Thursday, March 4, announcement by French auto parts retailer and repairer Parts Europe, formerly known as Autodis, about a potential initial public offering on Euronext Paris in 2021 or 2022, last week, our legal analysts examined the potential ramifications of an IPO under the group’s outstanding senior secured notes due 2022 and 2025.

Following TDR Capital’s announcement of a possible offer for Arrow Global Group plc, our legal analysts examined whether such a transaction would trigger the change-of-control put right under the bonds issued by Arrow Global Finance plc and any other potential side-effects under the bonds. The private equity firm approached the board of Arrow Global with a possible all-cash offer for the entire issued and to-be issued ordinary share capital of the U.K. debt collector at 305 pence per share.

U.K.-based hotel real estate group Vivion’s relatively solid financial position in the troubled hotel industry and its ample headroom has sparked speculation that its majority shareholder, Amir Dayan, may utilize that liquidity to extract value out of the group. Our legal analysts reviewed Vivion’s existing notes and highlighted that the group is not restricted by a typical high-yield restricted payments covenant or an asset sale covenant.

Reorg reported that Spanish gaming company Codere and its creditors are evaluating different plans to bolster the company’s liquidity, which is under pressure due to ongoing Covid-19 related measures in its operating markets. Our legal analysts examined possible avenues to boost liquidity that would be permitted under the amended and restated indenture governing the 2023 SSNs, including the option of raising additional super senior debt, subject to the necessary consents.
 
2020 Review and What to Look for in 2021

In February, we looked back on 2020 to examine the trends we saw in the leveraged finance market during the unprecedented global pandemic year. We also look forward to compiling a “watch list” of the aggressive terms we expect to feature in the leveraged loan market this year.

Progressive covenant erosion in debt packages in both the high-yield and leveraged loan markets continued in 2020 on the coattails of 2019. With the onset of the Covid-19 pandemic, some investors hoped that the ensuing financial crisis could bring some discipline to terms governing leveraged finance documentation. However, despite a few instances of successful investor pushback, the buy-side’s chase for yield resulted in many aggressive high-yield deals clearing the market with little to no resistance, while the perceived need for maximum borrower flexibility led to many attempts (often successful) to erode lender protections in leveraged loan transactions.

Click on the links below to read EMEA Covenants by Reorg’s reflections on the key changes and notable developments in the European high-yield bond market and leveraged loan market in 2020.

2020 European High-Yield Bonds Covenant Trends Round Up
2020 European Leveraged Loans Covenant Trends Round Up

In 2021, creative sponsors, borrowers and advisors will continue to find innovative ways to circumvent and weaken lender protections and EMEA Covenants by Reorg will keep you abreast of new developments as and when they arise. Click on the link below for our analysis of anticipated aggressive terms and emerging trends for the year ahead.

European Leveraged Loans Market in 2021: Watch List of Aggressive Terms and Emerging Flexibilities
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