Wed 02/02/2022 11:08 AM
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January European Covenants Analysis from the EMEA Covenants team

The European primary market started 2022 on the back foot. The volume of issuance in January 2022 almost halved compared to January last year, and of those companies who came to market, only a third traded up above their issue price. Market jitters spread across the European primary market in the last two weeks of January, causing issuers who did come to market to price wider than initial price guidance and some to rejig or shelve their issuance plans.

Football club Inter Milan’s media company, Inter Media and Communication SpA, priced its €415 million offering in senior secured notes due at 6.75%, a considerable 1.875 percentage point uplift on the 4.875% coupon of the senior secured notes it was refinancing.

On Friday, Jan. 28, technology firm ION Analytics pulled its $850 million - equivalent senior secured notes offering whilst resin-based consumer goods producer Keter postponed its €1.175 billion term loan B, both citing volatile market conditions as the reason. Covis Pharma, which was set to price on Friday, Jan. 28, pushed books to Friday, Feb. 4, entirely scrapped the dollar tranche of its bond offering and opted for an upsized dollar loan. A $300 million loan facility from Covis is reported by Bloomberg to be stuck with a group of underwriters led by Barclays.
ESG Remains on the Forefront of Investors Minds

Primary bond market debutant, cigarette filter producer Cerdia, priced its $600 million senior secured 2027s at a very steep 10.5% coupon (highest high-yield coupon since May 2021) as investors shied away from ESG suitability concerns over the tobacco sector. The high coupon is indicative that ESG concerns are at the forefront of investors' minds.

Sustainability-linked bond issuances have come a long way in European high-yield since last year, with three sustainability-linked bonds launching in the month of January this year already (Ziggo, Webuild and Fabbrica Italiana Sintetici). In 2021 the first sustainability-linked bond did not appear until February with Constellium sustainability-linked senior 2029s.

However, Italian construction company Webuild’s sustainability-linked senior 2026s require the payment of a one-time premium of €7.50 (in respect of each €1,000 in principal amount of the notes), only at the maturity and not before. Moreover, Webuild could avoid paying the sustainability premium even if it failed to reduce its targeted reduction in greenhouse gases if there was a change in law or an acquisition or divestiture that would impact the group’s ability to satisfy the reduction condition.

In the green bond sphere, U.K. vehicle lease operator and fleet manager Zenith debuted on the European high-yield market with £475 million green senior secured notes due 2027. The proceeds of the issuance will be used for refinancing, and not directly for green purposes.
Issuers’ Flexibilities to Incur Debt and Leak Value Reduce in January

High-yield issuers in January had less flexibility to incur collateral dilutive debt, to prime the notes and for value leakage at day one compared to the 2021 European market average for senior secured notes.

The outlier in January for the above mentioned flexibilities was Covis Pharma. Under the terms of its preliminary offering memorandum for its senior secured 2027s Covis Pharma can incur collateral dilutive debt to an amount equal to 342% of EBITDA at day one thanks to, in part, the presence of a dividend-to-debt toggle and a larger than usual ‘freebie’ amount in the credit facilities basket to the greater of $310.5 million and 115% of EBITDA. In addition, the U.S. style liens covenant allowed the general liens basket (typically reserved for securing debt over non-collateral assets) to be used to secure debt on the collateral up to 50% of EBITDA.

Continuing on from the trends seen in 2021, dividend-to-debt toggles, which convert unused restricted payment capacity into debt capacity, also featured in January deals from Allwyn Entertainment, Ceramtec, Renta and the now pulled issuance from ION Analytics. As illustrated below, the prevalence of this feature increased to 31% in January 2022 from 20% in 2021.

Absence of a cap on debt incurrence by non-guarantors alongside 0.9x of headroom under the ratio debt basket and an additional dedicated basket for non-guarantors restricted subsidiaries debt generated a day one capacity for priming debt to 260% of EBITDA for Covis Pharma.
Aggressive Terms Spotlight: Documentary Distortions to Ratios and Baskets to Increase Capacities

Although day one general purpose capacities decreased in January, aggressive calculations flexibilities that can inflate covenant capacities during lifetime of the bond have increased, as seen below:

Super-Growers or ‘‘High Water-Mark’’ Baskets

31% of European deals launched in January featured super-growers basket. This is nearly 3x the European market average of 12% for 2021.

2022 kicked off with issuers coming to market with calculation flexibilities that would increase their debt incurrence and dividend capacity. As illustrated above, 31% of high-yield bonds in January 2022 included super-grower or high water mark baskets compared to only 12% in 2021. Under these super-grower baskets, the fixed amount of a grower basket automatically and permanently resets to a higher level to match the increase in the “grower” element (typically EBITDA) of such a basket. The fixed amount of the basket will remain at the elevated level even if the grower element, such as EBITDA, reduces subsequently. In January, this flexibility was seen in the preliminary offering memorandums of CeramTec, eDreams, Inter Media, Renta and United Group.

Masking Leverage - Exclusion of RCF Debt From Leverage Ratios

26% of European deals launched in January excluded revolving debt from their leverage calculations compared to European market average of 16% for 2021.

Another calculation flexibility that increased in January was the ability for issuers to artificially reduce leverage ratios by excluding certain debt from the numerator of the ratio, even if such debt was outstanding. This artificial reduction in leverage ratio would result in an inflation of capacities to incur debt, make shareholder payments and achieve portability. This flexibility was seen in the preliminary offering memorandums of Ceramtec, Renta, True Potential and Voyage Care. Most commonly, uncapped amounts of revolving debt, letters of credit and bank guarantees used for working capital are excluded. Sometimes, this exclusion is permitted for a capped amount only, as seen in Asda’s senior secured 2026s.
Other Notable Developments

Allwyn Adaptations for a SPAC Listing

Allwyn Entertainment tailored the provisions of its new floating-rate 2028s in light of its upcoming listing on the NYSE through a special purpose acquisition company, or SPAC, expected in the second quarter of 2022. The adaptations included widening the equity claw so that proceeds from listing could be used for such a redemption and carving out the combination with the SPAC from the change-of-control provision. Value leakage provisions were loosened (compared to the existing SSNs) in light of the listing. The post-IPO annual dividends basket in the FRNs omitted a leverage test for access and this basket was also missing a default blocker. Similarly, Prax’s senior secured 2027s did not not include a leverage test requirement either in its post-IPO basket. The absence of a leverage test requirement is off-market and was seen in only 8% of 2021 European high-yield bonds in our Market Maker database.

Repeat Issuer restrict Investors Voting Ability

On their return to the primary market, Inter Media and United Group launched bonds with largely similar covenant packages to their existing notes but included new restrictions on investors’ ability to vote. United Group’s new senior secured 2030s included temporal limitations on when investors could take action on a default with a two-year sunset on this ability and provisions disenfranchising net short holders. Inter Media’s return to the primary market saw the introduction of a two-year sunset on calling a default.

Inter Media Offering Features Financial Covenants

Unusually for bonds, Inter Media’s senior secured 2027s feature financial covenants including a 1.5x debt service coverage ratio that is tested annually.
Primary Market: Bonds

A table of bonds priced in January along with Reorg’s legal coverage is below:

Credit Country Sector Amount Issue Price/Coupon Offering Uuse of Proceeds
Alsea Spain Restaurant/Pub €300M 100, 5.5% SNs 2027 Refinancing
CeramTec Germany Manufacturing €465M 100, 5.250% SNs 2030 Acquisition/LBO
Cerdia Germany Manufacturing $600M 97, 10.50% SSNs 2027 Refinancing
Covis Luxembourg Pharmaceuticals $350M Books close Feb. 4 SSNs 2027 Refinancing
eDreams Spain Travel and Transport €375M 100, 5.5% SSNs 2027 Refinancing/GCP
ION Analytics U.S. Technology $850M Pulled Pulled Dividend Refinancing
Inter Media Italy Services €415M 100, 6.75% SSNs 2027 Refinancing
Renta Sweden Industrial Services €350M E+4.375% FRNs 2027 Acquisition/LBO
Sazka/Allwyn Czech Consumer Discretionary €500M 3.875% Books close Feb. 2 SSNs 2027
SSNs 2028
Tereos France Agriculture €350M 100, 4.75% SNs 2027 Refinancing
True Potential U.K. Financials £400M
100, 6.5%
100, 5%
SSNs 2027 Refinancing Acquisition/LBO
Voyage U.K. Care Homes £250M 100, 5.875% SSNs 2027 Refinancing
Webuild (Sustainability) Italy Construction €400M 100, 3.875% SUNs 2026 Refinancing
United Group Netherlands Technology, Media and Telecoms €500M
100, 5.25%,
SSNs 2030
FRNs 2029
Zenith (Green) U.K. Consumer Discretionary $475M 100, 6.5% SSNs 2027 Refinancing
Ziggo (Sustainability) Netherlands Cable, Internet, Telecoms $1.525B
99.03, 5%
100, 3.5%
SSNs 2032 Refinancing

Primary Market: Loans

A table of loans reviewed by EMEA Covenants is below:

Credit Country Sector Amount Maturity OID/Margin Use of Proceeds
Arxada Switzerland Chemicals €302.41M
6.5Y 99.75, E+400 bps Acquisition/LBO
AutoForm Switzerland Technology, Media and Telecoms €472M 7Y 99.75 E+362.5 Acquisition/LBO
CeramTec U.K. Consumer Goods €1.48B 8Y 99.5, E+375 Acquisition/LBO
Covis  U.S. Pharmaceuticals $350M-Equivalent 5Y Prices Feb. 4 Refinancing
Dorna Spain Technology, Media and Telecoms €975M 7Y Prices Feb. 2 Refinancing
Hunter Douglas Netherlands Manufacturing $3.1B
Prices Feb. 8 Acquisition/LBO
McAfee U.S. Technology, Media and Telecoms $4.41B
7Y Prices Feb. 4 Acquisition/LBO
Saverglass France Manufacturing €500M 7Y Prices Feb. 4 Refinancing
TSG France Technology, Media and Telecoms €320M 7Y Priced - N/S General corporate purposes
Wella U.K. Consumer Goods €925M 7Y 99.75, E+375 Refinancing


To see the covenant analysis or to talk to one of our legal analysts regarding the names above, click HERE. You can get access to this analysis if you have a copy of the term sheet or the facilities agreement.
RCF Tracker

Our RCF tracker, which includes over 200 companies and is updated every week with new information and new borrowers, is HERE. This tracker aims to provide an overview of companies that have RCFs along with high-yield bonds in their capital structures. The tracker includes the committed and drawn amounts of RCFs as well as the corresponding financial covenants.
Webinars and Podcasts

2022: A Year of New Opportunities or Continuing Challenges?

In case you missed it, you can watch Managing Editor Luca Rossi in conversation with Antonio Casari of Northlight and Bruce Bell from Latham & Watkins in Reorg’s webinar from Jan. 19.

They discussed the stressed and distressed credit market outlook for 2022, covering the sectors and companies to monitor in Europe, and how governments and central banks’ policies are strongly influencing investors’ decisions.

Replay: To watch the replay, click HERE.
Other Resources

Our webinars and podcasts are available HERE. You can also subscribe to our podcasts on SoundCloud, iTunes and Spotify.

Our weekly Coronavirus Impact Recaps are HERE and our Covenants Weekly Recaps are HERE.
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