Issuer Covenant Card: GrafTech International Ltd.

Relevant Items:
Covenants Tear Sheet, Debt Document Summaries
GrafTech’s Debt Documents

GrafTech International Ltd. is a “leading manufacturer of high quality graphite electrode products essential to the production of electric arc furnace steel and other ferrous and non-ferrous metals,” according to its latest 10-Q. Continue reading for our Americas Covenants team's analysis and conclusions from the GrafTech International Ltd. covenant card and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.

Brookfield Asset Management bought the company in April 2015, and it completed an IPO in April 2018. As of Sept. 30, Brookfield owned about 65% of the company’s common stock.

On Dec. 22, GrafTech International’s wholly owned subsidiary GrafTech Finance Inc. issued $500 million of senior secured notes due 2028, the proceeds of which will be used to prepay part of GrafTech Finance’s term loan. The company also has a $250 million revolver that can be borrowed by GrafTech Finance as well as designated Swiss and Luxembourg subsidiaries. GrafTech International and its wholly owned material domestic subsidiaries guarantee, and their assets have been pledged to secure, all of the debt. The two European borrowers, as well as the parent of the Luxembourg borrower, also guarantee the foreign obligations under the revolver.

The company’s capital structure as of Sept. 30, 2020 - pro forma for a $60 million loan prepayment in October, the issuance of the new notes and the expected use of proceeds - is shown below:

 

 

• Springing financial covenant - Under the credit agreement, the company must meet a 4x first lien net leverage ratio covenant if the sum of outstanding revolving loans, outstanding swingline loans and the face amount of outstanding letters of credit (excluding undrawn letters of credit in an amount not to exceed $35 million) exceeds 35% of the aggregate revolving commitments. The revolver is currently undrawn, so this covenant is not tested, but if it were the company would be in compliance.


• Issuance of new secured notes - Because the proceeds of the secured notes were used to prepay term loans, they were likely incurred under the credit agreement as “Permitted First Priority Refinancing Debt,” which is defined as pari notes or loans that refinance the term loans or revolver. They therefore did not use any of the credit agreement’s general debt capacity.


• Debt and lien capacity - The company is permitted to incur $550 million of additional first lien secured debt and $981 million of additional junior lien secured debt, as governed by its credit agreement. Both the credit agreement and the secured notes permit unlimited unsecured debt under a 2x interest coverage test.


• Restricted payments, investments capacity - The company is currently not restricted in its ability to make investments, as its first lien net leverage ratio is less than 2.5x, the threshold for the leverage-based investment basket in both the secured notes and the credit agreement. While the secured notes permit unlimited restricted payments subject to compliance with a 2x first lien net leverage ratio, the credit agreement’s leverage-based restricted payments basket is accessible if the company can meet a 1.75x first lien leverage test. Given the company’s first lien leverage ratio following the issuance of the secured notes is about 1.9x, it is currently unable to access the leverage-based restricted payments basket under the credit agreement.Most debt documents that include leverage-based restricted payment and investment baskets typically require the borrower or issuer to meet a specified total leverage test to account for all outstanding debt.Because GrafTech can access these baskets by meeting first lien leverage tests, to the extent it uses its $981 million of junior lien debt capacity or incurs unsecured debt under the 2x interest coverage tests, its ability to access the its leverage-based restricted payment and investments baskets will be unaffected.Nevertheless, the company can still make $125 million of restricted payments as well as restricted payments using the “Available Amount,” which builds off of 50% of consolidated net income from Jan. 1, 2018.

--Alisha Turak