Covenants Weekly
Issuance of Warrants May Convert United Airlines’ CARES Act Grants Into Additional Dividend Capacity; Brink’s Co. Forgoes Flexibility for Covenant Relief; American Airlines, Liberty Latin America, CommScope Primary Reviews
Fri 06/26/2020 12:30 PM
Editor's Note: Below is Covenants by Reorg’s review of coverage for the week ended Friday, June 26. We provide a summary of our event-driven secondary coverage as well as this week’s primary issuances. We also list the top 10 most popular covenants analysis pieces downloaded from the Reorg site.
We analyzed whether the $3.5 billion grant given to United Airlines as part of the relief package under the CARES Act will increase the company’s capacity to pay dividends and buy back its equity. Because the company was required to issue warrants to the Treasury Department in return for the grants, it effectively converted the grant into an equity contribution. We also updated our coverage of the Brink’s Co. and discussed additional restrictions added to the company’s credit agreement in return for lenders providing the company with covenant relief.
In the primary market, we reviewed three issuers that came to market this week: American Airlines, Liberty Latin America and CommScope.
Below is the full list of entities covered by Covenants by Reorg this week:
Here are the most downloaded covenants tear sheets and debt document summaries for the week ended Friday, June 26:
United Airlines
United Airlines entered into a Payroll Support Program agreement with the U.S. Treasury Department that will provide it with total funding of approximately $5 billion, $3.5 billion of which will be in the form of grants.
As a condition to receiving this funding, United had to issue warrants to the Treasury Department.
Each of United’s debt documents has a builder basket that includes, among other things, cash proceeds received by the company from contributions to its equity or from the sale of certain equity interests.
Had United Airlines not been required to issue warrants to the Treasury Department in return for the grants, the grant proceeds almost certainly would not have constituted “net cash proceeds … received ... from the issue or sale of Qualifying Equity Interests.”
However, because the company did issue warrants, the $3.5 billion grant arguably increases United Airlines’ builder basket.
Pursuant to the CARES Act, those proceeds may not be used to pay dividends or make investments for 12 months. However, because the builder basket includes proceeds received in the past, the increased capacity under the builder basket will still be available after the 12-month anniversary of receipt of the grant and once the CARES Act restrictions are lifted. Even if the grants could never be used to fund restricted payments or investments, their receipt could still increase capacity, and that capacity could be funded with nongrant cash.
For United Airlines’ covenants tear sheet, click HERE.
Brink’s Co.
On Feb. 26, the company announced that it had agreed to purchase the majority of the cash operations of U.K.-based G4S plc, a global security and cash management company, for approximately $860 million and that:
“The acquisition will be completed in multiple phases, with more than half of the enterprise value expected to close within 60 days. The remaining closings are expected to be completed before December 31, 2020 based on the estimated timing required to obtain necessary licenses and other approvals.”
Although the company expects that its liquidity following the G4S acquisition will be about $800 million, the company recently entered into an amendment under its credit agreement pursuant to which in return for certain covenant relief, the company’s flexibility to access certain debt, lien, restricted payment and investment baskets was significantly reduced.
The amendment replaced a 4x net leverage ratio financial maintenance covenant with a 4.25x net first lien leverage ratio covenant through Dec. 31. The covenant then steps down to 4x for the first three quarters of 2021, to 3.75x for the quarter ended Dec. 31, 2021, and finally to 3.5x for each quarter thereafter through maturity.
In return for the covenant relief, however, the company is now required to meet specified first lien and total leverage tests in order to access most general-purpose debt, lien and investment baskets.
For Brink’s covenants tear sheet, click HERE. For Brink’s debt document summaries, click HERE.
Covenants by Reorg also reviewed three issuers that came to market this week: American Airlines, Liberty Latin America and CommScope. We analyzed the issuers’ ability to layer existing debt and pay out dividends and other key drivers of credit protection with Reorg’s Flexibility Scale.
Week Ended June 26
We analyzed whether the $3.5 billion grant given to United Airlines as part of the relief package under the CARES Act will increase the company’s capacity to pay dividends and buy back its equity. Because the company was required to issue warrants to the Treasury Department in return for the grants, it effectively converted the grant into an equity contribution. We also updated our coverage of the Brink’s Co. and discussed additional restrictions added to the company’s credit agreement in return for lenders providing the company with covenant relief.
In the primary market, we reviewed three issuers that came to market this week: American Airlines, Liberty Latin America and CommScope.
Below is the full list of entities covered by Covenants by Reorg this week:
Most Popular Reorg Covenants Analysis
Here are the most downloaded covenants tear sheets and debt document summaries for the week ended Friday, June 26:
- American Airlines 2025 Secured Notes Primary Summary
- United Airlines Covenants Tear Sheet
- Oasis Petroleum Covenants Tear Sheet
- PG&E Corp. 2025, 2028, 2030 Secured Notes Primary Summary
- AMC Entertainment Covenants Tear Sheet
- Cengage Term Loan Summary
- Hertz Covenants Tear Sheet
- Titan International Covenants Tear Sheet
- CBL & Associates Senior Notes Summary
- Ferrellgas 2025 Secured Notes Primary Summary
Event-Driven Secondary Coverage
United Airlines
United Airlines entered into a Payroll Support Program agreement with the U.S. Treasury Department that will provide it with total funding of approximately $5 billion, $3.5 billion of which will be in the form of grants.
As a condition to receiving this funding, United had to issue warrants to the Treasury Department.
Each of United’s debt documents has a builder basket that includes, among other things, cash proceeds received by the company from contributions to its equity or from the sale of certain equity interests.
Had United Airlines not been required to issue warrants to the Treasury Department in return for the grants, the grant proceeds almost certainly would not have constituted “net cash proceeds … received ... from the issue or sale of Qualifying Equity Interests.”
However, because the company did issue warrants, the $3.5 billion grant arguably increases United Airlines’ builder basket.
Pursuant to the CARES Act, those proceeds may not be used to pay dividends or make investments for 12 months. However, because the builder basket includes proceeds received in the past, the increased capacity under the builder basket will still be available after the 12-month anniversary of receipt of the grant and once the CARES Act restrictions are lifted. Even if the grants could never be used to fund restricted payments or investments, their receipt could still increase capacity, and that capacity could be funded with nongrant cash.
For United Airlines’ covenants tear sheet, click HERE.
Updated Secondary Coverage
Brink’s Co.
On Feb. 26, the company announced that it had agreed to purchase the majority of the cash operations of U.K.-based G4S plc, a global security and cash management company, for approximately $860 million and that:
“The acquisition will be completed in multiple phases, with more than half of the enterprise value expected to close within 60 days. The remaining closings are expected to be completed before December 31, 2020 based on the estimated timing required to obtain necessary licenses and other approvals.”
Although the company expects that its liquidity following the G4S acquisition will be about $800 million, the company recently entered into an amendment under its credit agreement pursuant to which in return for certain covenant relief, the company’s flexibility to access certain debt, lien, restricted payment and investment baskets was significantly reduced.
The amendment replaced a 4x net leverage ratio financial maintenance covenant with a 4.25x net first lien leverage ratio covenant through Dec. 31. The covenant then steps down to 4x for the first three quarters of 2021, to 3.75x for the quarter ended Dec. 31, 2021, and finally to 3.5x for each quarter thereafter through maturity.
In return for the covenant relief, however, the company is now required to meet specified first lien and total leverage tests in order to access most general-purpose debt, lien and investment baskets.
For Brink’s covenants tear sheet, click HERE. For Brink’s debt document summaries, click HERE.
Primary Review
Covenants by Reorg also reviewed three issuers that came to market this week: American Airlines, Liberty Latin America and CommScope. We analyzed the issuers’ ability to layer existing debt and pay out dividends and other key drivers of credit protection with Reorg’s Flexibility Scale.
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