Fri 08/20/2021 11:43 AM
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Relevant Items:
Covenants Tear Sheet, Debt Document Summaries
Lamb Weston Holdings Debt Documents

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Lamb Weston Holdings is a global producer, distributor and marketer of value-added frozen potato products. The company’s fiscal year ended on May 30 with its year-over-year consolidated adjusted EBITDA down 10.5%.

On Aug. 11, the company amended both of its credit agreements. The amendment to the revolver increased its size, to $1 billion from $750 million, extended its maturity and made various changes to the negative covenants. The amendment to the term loan contained conforming changes to the negative covenants in the revolver. Although the revolver and term loan are governed by separate credit agreements, they contain largely identical covenants, including the financial covenants.

The company’s capital structure is shown below for reference:

 
Covenant Conclusions

 

  • Financial covenants - The revolver and term loan contains two financial covenants: a 5x net leverage ratio covenant (that will drop to 4.75x with the quarter ending February 2025) and a 2.75x interest coverage ratio covenant. For four full fiscal quarters following an acquisition over $350 million, the maximum leverage ratio will be increased by 0.5x.As of May 30, the company is in compliance with both covenants.

  • Collateral and guarantee suspension period - If there is no default and the borrower has a long-term non-credit-enhanced debt rating at least BBB- or Baa3 by two of Moody's, S&P and Fitch, all collateral and guarantors will be released from the credit agreements. During this period, the company must comply with a lower net leverage ratio covenant of 3.5x but can make unlimited investments, restricted payments and debt prepayments, in the latter two cases as long as there is no event of default.

  • Secured debt capacity - Given its current financials, the company can incur $3.2 billion of additional secured debt and unsecured debt until either the fixed charge coverage ratio is not greater than 2x or total unsecured debt is $1.9 billion, whichever comes first.The most restrictive of the senior notes permit up to $2 billion of credit facilities debt, general secured debt up to the greater of $250 million and 10% of total assets, liens until the secured net leverage ratio does not exceed 1.5x, and additional liens up to the greater of $100 million and 4.5% of total assets. They also permit unsecured debt (which can be paired with either liens basket) as long as the fixed charge coverage ratio is greater than 2x.The credit agreements contain matching debt and lien general baskets for the greater of $525 million and 12.5% of total assets as well as ratio debt baskets that permit secured debt as long as the secured net leverage ratio does not exceed 3.5x and unsecured debt as long as the company is in pro forma compliance with its financial covenants. Incremental equivalent debt is permitted using the same tests as the ratio basket but with additional set amounts of $100 million in the term loan and the greater of $650 million and 100% of EBITDA in the revolver.

  • Restricted payments and investments - Currently, the company can make unlimited investments and restricted payments. Under the revolver and term loan, the company can make unlimited restricted payments if the total net leverage ratio is not greater than 4.25x and unlimited investments if the total net leverage ratio is not greater than 4.5x. The senior notes permit unlimited restricted payments (which include restricted investments) as long as the net leverage ratio is not greater than 3.75x. All of these ratios are currently met.

  • Senior note purchases - The revolver and the term loan include covenants that prohibit the company from making any optional prepayments, repurchases or redemptions of certain debt, including the senior notes. Note purchases are permitted if the net leverage ratio does not exceed 4.25x and there is no event of default.Purchases can also be made using the general restricted payments basket (which is for the greater of $425 million and 10% of total assets) or the “Available Amount,” which has a $677 million starter amount.

  • Agent clawback provisions - The revolver and term loan contain agent clawback provisions, which are meant to protect the administrative agent should it make erroneous payments to lenders. The provisions allow the applicable agent to claw back any payments it determines (which determination will be conclusive absent manifest error) were made erroneously. This is a different formulation than the “sole discretion” language we typically see.

  • Senior note redemptions - The senior notes due 2024 and the senior notes due 2026 both contain expired equity clawback provisions and have call schedules starting in November. The senior notes due 2024 can be redeemed at par for one year prior to maturity; the senior notes due 2026 can be redeemed at par for two years prior to maturity.The senior notes due 2028, however, contain no equity callback provisions or call schedule. They can be redeemed with a make whole amount until Nov. 15, 2027, the date that is six months prior to their maturity, when they can be redeemed at par.


--Alisha Turak
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