Hilton Grand Vacations Inc.
Hilton Grand Vacations Loosened Its Leverage Covenant; Updated Covenants Tear Sheet Available
Tue 05/19/2020 16:31 PM
Relevant Items:
Covenants Tear Sheet and Debt Document Summaries
Debt Documents
Hilton Grand Vacations reported its March 30 financials on April 30, the first quarter that reflects the coronavirus pandemic. On the earnings call, management stated that “while we saw minimal effects from the virus in January and February, it should come as no surprise that we saw a significant falloff in trends in March as the effects of the virus spread to the U.S.” Company responses to the virus have included furloughing 70% of staff and reducing salaries for nonfurloughed staff, among other measures.
The company also disclosed that during the first quarter it drew $440 million on its revolver, leaving only $39 million of availability, and also borrowed against receivables securitized through its receivables facility. Liquidity as of March 31 was $963 million, comprising $669 million of cash, $39 million of revolver availability and $255 million of availability under its receivables revolver.
Following earnings, on May 8 the company amended its revolver and term loan agreement to, among other things, amend the agreement’s leverage covenant and related EBITDA calculation.
The company’s capital structure as of March 31 is as follows, with updated applicable margin for the revolver and term loan:
The credit agreement that governs the company’s revolver and term loan contains two financial covenants: a 2.00x interest coverage covenant and a net first lien leverage covenant, each of which are tested quarterly. Interest coverage was approximately 12x as of March 31, and net first lien leverage was approximately 0.5x.
The amendment loosened the net first lien leverage test from a 2.00x test to a 3.00x for the testing period that will end on June 30, stepping up at year-end to 3.50x and then stepping down by 0.25x turns for each of the following two quarters.
Net first lien leverage is calculated as the ratio of first lien debt, net of an uncapped amount of unrestricted cash (and other specified amounts), to covenant EBITDA. Using financials as of March 31, under a 3.00x test, covenant EBITDA could decline to $93 million, or by about $422 million, before breaching the covenant. Assuming no cash netting, the ratio as of March 30 was approximately 1.8x.
The amendment also allows Hilton to elect to use an alternative annualized EBITDA for purposes of determining compliance with the financial covenants, beginning with the testing period that will end Dec. 31, 2020, through June 30, 2021.
Hilton may elect to return to calculating EBITDA on an LTM basis, but it cannot then re-elect to use annualized EBITDA, and annualized EBITDA generally cannot be used for other purposes under the agreement such as calculating capacity under carve-outs to the restrictive covenants. Under the amendment, annualized EBITDA will be calculated as follows, if elected:
The company cannot use the annualized EBITDA formulation until the testing period ending at year-end 2020, and, unlike many other EBITDA amendments companies have recently obtained, Hilton’s alternative EBITDA formulation does not count pre-coronavirus EBITDA. That said, the step up to the leverage covenant’s ratio test does provide the company with some breathing room.
Other notable changes to the credit agreement that the May 8 amendment implemented include changes to pricing and various leverage-based baskets:
Covenants Tear Sheet and Debt Document Summaries
Debt Documents
Hilton Grand Vacations reported its March 30 financials on April 30, the first quarter that reflects the coronavirus pandemic. On the earnings call, management stated that “while we saw minimal effects from the virus in January and February, it should come as no surprise that we saw a significant falloff in trends in March as the effects of the virus spread to the U.S.” Company responses to the virus have included furloughing 70% of staff and reducing salaries for nonfurloughed staff, among other measures.
The company also disclosed that during the first quarter it drew $440 million on its revolver, leaving only $39 million of availability, and also borrowed against receivables securitized through its receivables facility. Liquidity as of March 31 was $963 million, comprising $669 million of cash, $39 million of revolver availability and $255 million of availability under its receivables revolver.
Following earnings, on May 8 the company amended its revolver and term loan agreement to, among other things, amend the agreement’s leverage covenant and related EBITDA calculation.
The company’s capital structure as of March 31 is as follows, with updated applicable margin for the revolver and term loan:
The Amended Credit Agreement
The credit agreement that governs the company’s revolver and term loan contains two financial covenants: a 2.00x interest coverage covenant and a net first lien leverage covenant, each of which are tested quarterly. Interest coverage was approximately 12x as of March 31, and net first lien leverage was approximately 0.5x.
The amendment loosened the net first lien leverage test from a 2.00x test to a 3.00x for the testing period that will end on June 30, stepping up at year-end to 3.50x and then stepping down by 0.25x turns for each of the following two quarters.
Net first lien leverage is calculated as the ratio of first lien debt, net of an uncapped amount of unrestricted cash (and other specified amounts), to covenant EBITDA. Using financials as of March 31, under a 3.00x test, covenant EBITDA could decline to $93 million, or by about $422 million, before breaching the covenant. Assuming no cash netting, the ratio as of March 30 was approximately 1.8x.
The amendment also allows Hilton to elect to use an alternative annualized EBITDA for purposes of determining compliance with the financial covenants, beginning with the testing period that will end Dec. 31, 2020, through June 30, 2021.
Hilton may elect to return to calculating EBITDA on an LTM basis, but it cannot then re-elect to use annualized EBITDA, and annualized EBITDA generally cannot be used for other purposes under the agreement such as calculating capacity under carve-outs to the restrictive covenants. Under the amendment, annualized EBITDA will be calculated as follows, if elected:
The company cannot use the annualized EBITDA formulation until the testing period ending at year-end 2020, and, unlike many other EBITDA amendments companies have recently obtained, Hilton’s alternative EBITDA formulation does not count pre-coronavirus EBITDA. That said, the step up to the leverage covenant’s ratio test does provide the company with some breathing room.
Other notable changes to the credit agreement that the May 8 amendment implemented include changes to pricing and various leverage-based baskets:
- Pricing - Amended from L+ 150-220 bps with a 0.0% floor to L+ 175-350 bps with a 0.25% floor.
- Ratio Baskets:
- Pari First Lien Ratio Debt - Amended from a 1.00x net first lien ratio test to a 1.00x test that steps up to 3.5x during the second half of 2020 and then down to 3.25x during the first half of 2021 and 2.25x thereafter.
- Junior Lien Ratio Debt - Amended from a 2.00x net leverage test to a 2.00x test that steps up to 5.00x during the second half of 2020 and then down to 4.00x during the first half of 2021 and 3.00x thereafter.
- Unsecured Ratio Debt - Amended from compliance with the financial covenants (a 2.00x interest coverage test and a 2.00x net first lien leverage test) to either a 2.00x interest coverage test or a 4.00x net leverage test.
- Ratio RP Basket - Amended from a 2.00x net leverage ratio test to a 3.00x net leverage ratio test.
- Ratio Investment Basket - Amended from a 2.00x net leverage ratio test to the same test as used under the junior lien ratio debt basket.
- Pari First Lien Ratio Debt - Amended from a 1.00x net first lien ratio test to a 1.00x test that steps up to 3.5x during the second half of 2020 and then down to 3.25x during the first half of 2021 and 2.25x thereafter.
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