Exit Financing Coverage: iHeart’s Ability to Make Restricted Payments, Investments Under Exit Term Loan Could Be Significant Given EBITDA-Based Builder Basket

     
iHeart, which began its confirmation hearing Wednesday, Jan. 10, plans to emerge from bankruptcy with about $450 million of commitments under an asset-based revolving credit facility, $3.5 billion in aggregate of term loans, $800 million of secured notes and $1.45 billion of unsecured notes.

In their amended plan supplement for their fifth amended plan of reorganization, the iHeart debtors disclosed term sheets for the company’s exit term loan and notes, which stated that the documentation would be based on documentation governing Travelport’s senior secured term loan and revolving credit facility and its secured notes.

In this piece, we provide an overview of certain key terms and provisions under iHeart’s exit financing that are included in the term sheets. The article also compares the agreements with iHeart’s prebankruptcy credit agreement and with Travelport’s credit agreement and secured notes.

Although the term sheets for the exit notes provide that the documentation will include “J.Crew/iHeart loophole closures to be agreed,” the term sheet for the exit term loan does not. Travelport’s credit agreement includes a proceeds basket that is similar to the proceeds basket under J.Crew’s term loan and would likely permit Travelport to transfer significant assets to unrestricted subsidiaries.

The exit term loan also includes a builder basket based on 100% of EBITDA less 1.4x interest expense and does not provide initial lenders with most favored nation, or MFN, protection if iHeart incurs pari ratio debt.

Under Travelport’s credit agreement and secured notes, the company’s material U.S., U.K., Bermuda and Luxembourg subsidiaries guarantee the company’s obligations; although they are also secured by pledges of equity of all guarantors, they are secured by liens on U.S. property only.

Whether iHeart’s foreign subsidiaries will guarantee the company’s exit financing and whether the term loan and secured notes will be guaranteed by assets of foreign subsidiaries are issues that are “under discussion.”
 
As reported, the iHeart debtors filed an amended plan supplement for their fifth amended plan of reorganization on Nov. 16 that included term sheets for the new exit term loan (the “Exit Term Loan”), secured notes (the “Exit Secured Notes”) and unsecured notes (together with the Exit Secured Notes, the “Exit Notes,” and together with the Exit Term Loan, the “Exit Financing Term Sheets”).

The Exit Financing Term Sheets provide that the Documentation Precedent for iHeart’s exit financing will be Travelport’s term loan and revolving credit facility (the “Travelport Credit Agreement”) and the indenture governing Travelport’s 6% senior secured notes due 2026 (the “Travelport Secured Notes”).

According to the supplement, iHeart’s exit financing will include:
 

• A $3.5 billion seven-year facility with pricing at L+375, subject to adjustment based on the single-B leveraged loan index; there is no LIBOR floor or OID.
   
• $800 million of secured seven-year, non-call-three notes (the “Exit Secured Notes”) with “anticipated pricing terms” including an “Anticipated” rate of 6.5% to 6.75% and an issue price of par. With respect to rate, a footnote in the term sheet states: “Mechanism by which rate is subject to increase or decrease by an amount equal to the increase in the BofA Merrill Lynch US High Yield Option-Adjusted Spread from the date of this term sheet to the date of issuance, with such increase or decrease rounded to the nearest 0.125%, subject to discussion.”
   
• $1.45 billion of unsecured eight-year, non-call-three notes with “anticipated pricing terms” including an “Anticipated” rate of 8.5% to 8.75%, subject to the same high-yield index-based adjustment described above, and a par issue price, among other terms.

iHeart’s expected capital structure upon its emergence from bankruptcy is illustrated below for reference.
 
In this piece, we provide an overview of the key terms and provisions included in iHeart’s Exit Financing Term Sheets, including by comparing the Exit Financing Term Sheets with iHeart’s prepetition term loan and revolving credit facility (the “Prepetition Credit Agreement”) and discussing provisions in Travelport’s Credit Agreement and Secured Notes that may guide certain additional provisions under iHeart’s Exit Financing that is currently being discussed.
   
The following table illustrates notable differences between the guarantee and collateral requirements under the term sheet governing iHeart’s Exit Term Loan, iHeart’s Prepetition Credit Agreement and the Travelport Credit Agreement.
 
As illustrated above, iHeart’s Exit Term Loan will be guaranteed by the company’s material domestic subsidiaries and will be secured by pledges of their equity and substantially all their assets. However, whether the Exit Term Loan will also be guaranteed by iHeart’s foreign subsidiaries and secured by pledges of their assets are issues that are still being discussed.

Under the Travelport Credit Agreement, the company’s material U.S., U.K., Bermuda and Luxembourg subsidiaries guarantee the company’s obligations; although it is also secured by pledges of equity of all guarantors, it is secured by liens on U.S. property only.
 
The following table illustrates notable differences between certain negative covenants under the term sheet governing iHeart’s Exit Term Loan, iHeart’s Prepetition Credit Agreement and the Travelport Credit Agreement.
   
As illustrated above, iHeart’s proposed Exit Term Loan’s debt and liens covenants that are described in the Exit Financing Term Sheets are similar to those under Travelport’s Credit Agreement and depending on iHeart’s leverage ratios could permit the company to incur significantly more secured debt than what its Prepetition Term Loan permitted.

Interestingly, the MFN protection under the Exit Term Loan is arguably more aggressive than the protection under Travelport’s Credit Agreement. Whereas initial lenders under Travelport’s Credit Agreement have 50-bps MFN protection with no sunset, other than with respect to $150 million of incremental term loans (plus an additional $150 million to fund acquisitions and investments) incurred within 18 months of closing, initial lenders under the Exit Term Loan have 50-bps MFN protection for 12 months and only in respect of incremental term loans that mature less than one year after the initial term loans mature.

Under both the Exit Term Loan and Travelport’s Credit Agreement, lenders have no MFN protection if the borrowers incur pari ratio debt.
 
Although iHeart’s Prepetition Credit Agreement and the Travelport Credit Agreement include builder baskets based on 50% of consolidated net income, the Exit Term Loan would include a builder basket based on 100% of EBITDA, less 1.4x interest expense, according to the term sheet.

Although the term sheet governing the Exit Term Loan does not provide detail about the definition of EBITDA or permitted EBITDA addbacks, as illustrated below, while the definition of “Consolidated EBITDA” under iHeart’s Prepetition Credit Agreement permitted $100 million of cost savings addbacks with an 18-month look-forward period, the definition under the Travelport Credit Agreement permitted uncapped cost savings with a 24-month look-forward period.
 
As such, if the definition of EBITDA under the Exit Term Loan is similar to the definition under the Travelport Credit Agreement, the builder basket under the Exit Term Loan could be significant and could provide the company with significant capacity to make restricted payments and investments.

On a recent Reorg podcast, we discussed how the definition of EBITDA under Envision’s and Refinitiv’s bonds included uncapped cost savings with 24-month look-forward periods and how Envision’s builder basket was also based on EBITDA less interest expense.
 
Although, as mentioned below, the Secured Notes’ and Unsecured Notes’ Term Sheets explicitly state that the indentures governing the notes will include “J.Crew/iHeart loophole closures to be agreed,” the Exit Facility Term Sheet does not. While it is possible the Exit Term Loan will not include a restricted subsidiary/unrestricted subsidiary distinction, given that iHeart’s Prepetition Term Loan and Travelport’s Credit Agreement do include the distinction, the Exit Term Loan likely will too.

The Travelport Credit Agreement, as illustrated below, includes a proceeds basket that is similar to the proceeds basket in J.Crew’s credit agreement that we have previously discussed that could potentially allow a significant amount of assets to be transferred to unrestricted subsidiaries.
 
The Travelport Credit Agreement also includes a separate investment basket permitting additional investments in unrestricted subsidiaries not to exceed the greater of $100 million and 17.5% of EBITDA.

Because the Exit Facility Term Sheet does not explicitly state that the Exit Term Loan will include “J.Crew/iHeart loophole closures to be agreed” and because the Exit Term Loan documentation will be based on Travelport’s Credit Agreement, which includes a J.Crew-like proceeds basket, it is not unreasonable to infer that the Exit Term Loan may include a similarly constructed proceeds basket.
 
The following table illustrates notable differences between the Exit Notes and Travelport’s Secured Notes.
 
Although the Exit Financing Term Sheets do not provide a significant amount of detail on specific negative covenant baskets, as mentioned above, they explicitly state that agreed-upon J.Crew loophole closures will be included.

As illustrated in the Travelport Secured Notes Summary, the Travelport Secured Notes do not require that revolving commitments be permanently reduced by the amount of revolving loans that the company chooses to repay with asset sale proceeds. Accordingly, under the Travelport Secured Notes, Travelport could effectively freely use asset sale proceeds as it would revolver borrowings. By permitting the company to rely on asset sale proceeds to repay revolver borrowings, the company may be able to draw on its revolver, freely use the proceeds from such draw and immediately repay such borrowing with asset sale proceeds.