Wed 08/19/2020 14:34 PM
Relevant Items:
Five Point’s Debt Documents
Five Point’s Covenants Tear Sheet, Debt Document Summary

The above relevant items are available only to current Covenants by Reorg clients and trialists. Request a trial to access the accompanying covenants tear sheet and debt document summary

Five Point Holdings LLC, together with its operating subsidiaries, owns and develops mixed-use, master-planned communities in California. The company is primarily engaged in the business of developing its three existing communities: Valencia in Los Angeles County, Candlestick in San Francisco County and Great Park Neighborhoods in Orange County. According to disclosures, the company’s three existing communities have the general plan and zoning approvals necessary for the construction of thousands of homesites and millions of square feet of commercial space.

The company’s operating subsidiary, Five Point Operating Company LP, is the borrower under a $125 million unsecured revolver facility; the company also has $625 million of 7.875% senior unsecured notes due 2025 issued by Five Point Operating Company LP and Five Point Capital Corp. The unsecured revolver and 2025 unsecured notes are guaranteed by the company’s wholly owned material domestic subsidiaries.

In an April 28 letter to shareholders addressing the economic uncertainty resulting from the Covid-19 pandemic, the company announced that it would be implementing a “3-6-9 Plan” to monitor and reduce variable expenditures as needed, assuming revenues are delayed three, six or nine months. While discussing the plan on its recent earnings call, the company emphasized two “levers” that it could use, if necessary, to preserve its “strong liquidity position”: “an ability to shut down 2/3 of [its] operational expenditures on short notice” and the fact that “50% of [its] employment-related G&A costs are discretionary.” As of June 30, the company’s total accessible liquidity was approximately $340 million.

The company’s capital structure and leverage metrics as of June 30 are shown below:
Five Point Holdings covenants analysis capital structure from the Covenants by Reorg team

 
Covenant Conclusions

 

  • “Term-out” of the revolver - The revolving credit agreement contains a “term-out” feature that automatically converts outstanding revolving loans into term loans (and automatically terminates any unused revolving commitments) upon the occurrence of (a) the scheduled revolver maturity date (April 18, 2022) or (b) a breach of the “first-tier” financial covenants. Converted term loans mature 12 months after the conversion date and are payable in equal monthly installments.

  • “First-tier” and “second-tier” financial covenants; liquidity - The revolving credit agreement contains four financial covenants: (1) minimum tangible net worth, (2) interest coverage / minimum liquidity, (3) debt to adjusted enterprise value and (4) minimum unpledged assets - which are tested at “first-tier” and “second-tier” thresholds as illustrated further below. The first-tier and second-tier covenant thresholds are tested together on a quarterly basis but trigger different consequences depending on which tier is breached. Specifically, a breach of any first-tier financial covenant would cause outstanding revolving loans to convert into term loans but would not trigger an event of default unless the second-tier threshold is also breached. As the below table illustrates, the company was in compliance with all first-tier and second-tier financial covenants as of June 30.
    Five Point Holdings financial covenants from the Covenants by Reorg team

    As of June 30, the company had approximately $340 million of accessible liquidity, comprising $215 million of unrestricted cash and $125 million of revolving availability.

  • Negative covenant capacities - Other than the financial covenants described above, the revolving credit agreement does not contain its own set of negative covenants. Instead, the credit agreement requires that, to the extent the company issues capital markets debt after April 18, 2017 (the revolving facility closing date), any negative covenants included in the indentures governing such capital markets debt are deemed incorporated into the credit agreement. Accordingly, the negative covenants under the indenture governing the company’s 7.875% senior unsecured notes due 2025, which were issued in November 2017, determine the company’s ability to engage in certain transactions, including to incur debt and make restricted payments.



      • Debt and liens - As of June 30, the company’s debt documents provided $806 million of general-purpose debt capacity, comprising $170 million under a credit facilities basket (which may be fully secured) and $636 million under general and ratio debt baskets (of which $28 million may be secured by general liens). Note, however, that the company may not incur more than $551 million of additional debt without breaching the first-tier debt-to-tangible-capital covenant under the revolver (tested quarterly at 40%), which, although not an event of default, would trigger the revolver’s term-out feature.

      • Dividends and investments - As of June 30, the company’s debt documents provided (a) at least $57 million of general restricted payment capacity plus any additional amounts available under the builder basket (which was accessible as of June 30) and (b) $28 million of capacity for general investments in a similar business.




     

    • Prepayments; note repurchases - The company’s debt documents do not restrict prepayments of other debt other than payment subordinated debt; accordingly, the company is not restricted from repurchasing the 2025 notes.

    • Asset sales - Proceeds from asset sales in excess of $15 million may be used, subject to the company’s reinvestment rights, to repay (a) debt secured by permitted liens, (b) the 2025 notes or other pari passu debt as long as the 2025 notes are ratably repaid, or (c) permitted nonguarantor debt.




--Julian Bulaon
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