KME SE
Covenant Analysis: KME Restricted Payments Basket Allows €28.1M to Be Upstreamed to Help Intek Refinance €101.7M 2020 Bond
Wed 02/05/2020 12:00 PM
Relevant Documents:
KME’s Covenants & Financial Model
Intek Offering Memorandum
KME 2023 Notes Offering Memorandum
KME’s parent Intek is facing a €101.7 million maturity on Feb. 20, along with the associated interest coupon of €5.1 million. In the event that the company’s refinancing plans do not work out and Intek is short on liquidity, the group has an option to extract €28.1 million out of KME through a €5 million per annum dividend restricted payments basket and a €23.1 million general basket. The general basket is the greater of €20 million and 3% of non-current assets.
Intek’s plan to refinance its bonds comprises a part-voluntary exchange of the current bonds, part-issuance of new 4.5% notes, and cash on its balance sheet. We note that Intek said in its first-half 2019 report that there is €18 million in receivables due from KME and guarantee deposits.
The corporate structure of the company is below. KME is owned by Intek Group SpA, a listed Italian company based in Milan. The company is in turn controlled by a vehicle, Quatroduedue SpA, that holds the majority of voting shares which consolidates into a Dutch holding company Quatroduedue Holdings BV.
Intek’s base case transaction to address the maturity contemplates €25 million in new notes’ issuance supplemented by roughly €50 million of notes of exchanged debt. The rest would be financed through cash. Only 33.7% of the 2020 notes have been tendered as of Feb. 4 while issuance of the new €25 million notes may prove tricky given the low coupon in comparison to KME’s 2023 notes yield of 18.7%.
There was an additional €45.6 million of cash at Intek as of June 30, 2019, which can to an extent be used to pay down the maturity. Separately, the company also makes reference to a contemplated €25 million credit facility to bridge the shortfall and potential intercompany loans from Intek’s holdings.
The group highlights that if the offer results in a bond issuance of a nominal amount of equal to €15 million, the company could use other financial resources deriving from the sale of some of the group’s activities.
KME’s offering memorandum contains a €23.1 million restricted payments general basket and a €5 million per annum dividend carve-out to potentially support Intek in addressing the maturity as per below:
Restricted payments covenants in high-yield bonds typically restrict issuers from directly or indirectly making restricted payments, subject to a number of exceptions. Given the restriction on indirect dividends, issuers would likely not be permitted to use their investment capacity to shift value to unrestricted subsidiaries and have those unrestricted subsidiaries pay a dividend, given such dividends would constitute an indirect restricted payment (unless the issuer had the capacity to pay that dividend directly).
However, most bonds also typically include a restricted payment basket that permits issuers to distribute the equity of unrestricted subsidiaries to its equityholders. Because this basket is an exception to the restriction on direct and indirect restricted payments, issuers can use this basket to shift value to unrestricted subsidiaries and then pay a dividend in the form of the equity of that unrestricted subsidiary. Nevertheless, because the 2023 notes do not include a basket permitting KME to distribute the equity of unrestricted subsidiaries, the company is likely unable to use its investment capacity to transfer additional value up to its parent.
KME’s capital structure is below:
Appendix:
--Ben Kovacka
KME’s Covenants & Financial Model
Intek Offering Memorandum
KME 2023 Notes Offering Memorandum
KME’s parent Intek is facing a €101.7 million maturity on Feb. 20, along with the associated interest coupon of €5.1 million. In the event that the company’s refinancing plans do not work out and Intek is short on liquidity, the group has an option to extract €28.1 million out of KME through a €5 million per annum dividend restricted payments basket and a €23.1 million general basket. The general basket is the greater of €20 million and 3% of non-current assets.
Intek’s plan to refinance its bonds comprises a part-voluntary exchange of the current bonds, part-issuance of new 4.5% notes, and cash on its balance sheet. We note that Intek said in its first-half 2019 report that there is €18 million in receivables due from KME and guarantee deposits.
The corporate structure of the company is below. KME is owned by Intek Group SpA, a listed Italian company based in Milan. The company is in turn controlled by a vehicle, Quatroduedue SpA, that holds the majority of voting shares which consolidates into a Dutch holding company Quatroduedue Holdings BV.
(Click HERE to expand.)
Intek’s base case transaction to address the maturity contemplates €25 million in new notes’ issuance supplemented by roughly €50 million of notes of exchanged debt. The rest would be financed through cash. Only 33.7% of the 2020 notes have been tendered as of Feb. 4 while issuance of the new €25 million notes may prove tricky given the low coupon in comparison to KME’s 2023 notes yield of 18.7%.
There was an additional €45.6 million of cash at Intek as of June 30, 2019, which can to an extent be used to pay down the maturity. Separately, the company also makes reference to a contemplated €25 million credit facility to bridge the shortfall and potential intercompany loans from Intek’s holdings.
The group highlights that if the offer results in a bond issuance of a nominal amount of equal to €15 million, the company could use other financial resources deriving from the sale of some of the group’s activities.
KME’s offering memorandum contains a €23.1 million restricted payments general basket and a €5 million per annum dividend carve-out to potentially support Intek in addressing the maturity as per below:
(Click HERE to expand.)
Restricted payments covenants in high-yield bonds typically restrict issuers from directly or indirectly making restricted payments, subject to a number of exceptions. Given the restriction on indirect dividends, issuers would likely not be permitted to use their investment capacity to shift value to unrestricted subsidiaries and have those unrestricted subsidiaries pay a dividend, given such dividends would constitute an indirect restricted payment (unless the issuer had the capacity to pay that dividend directly).
However, most bonds also typically include a restricted payment basket that permits issuers to distribute the equity of unrestricted subsidiaries to its equityholders. Because this basket is an exception to the restriction on direct and indirect restricted payments, issuers can use this basket to shift value to unrestricted subsidiaries and then pay a dividend in the form of the equity of that unrestricted subsidiary. Nevertheless, because the 2023 notes do not include a basket permitting KME to distribute the equity of unrestricted subsidiaries, the company is likely unable to use its investment capacity to transfer additional value up to its parent.
KME’s capital structure is below:
(Click HERE to expand)
Appendix:
--Ben Kovacka
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