Thu 09/09/2021 08:53 AM
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2029 Senior Notes Core Analysis

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Papa John’s International has announced the launch of $400 million of senior unsecured notes due 2029 (the “New Notes”), which are expected to price today, Thursday, Sept. 9. Proceeds of the New Notes will be used, together with borrowings under an amended revolving facility, to repay in full the company’s existing term loan and revolving credit facilities.

Papa John’s plans to amend its existing credit agreement to increase revolving commitments from $400 million to $600 million and extend the maturity for an additional five-year term. The agreement will also be amended to provide increased covenant flexibility, including with respect to financial covenants, and a decrease in the applicable margin on borrowings and the unused revolving commitment fee.

Papa John’s debt structure as of June 27, adjusted for the New Notes and the amendment and repayment of the company’s credit agreement, is summarized below:

A comprehensive report on the New Notes is available HERE.
Notable Issues

Items of interest under the New Notes include:

  • Secured debt capacity: The New Notes provide significant secured debt capacity at issuance, primarily because of a “Debt Facilities” debt basket permitting the greater of $1.1 billion and an amount in compliance with a 3x gross leverage ratio. At issuance, the fixed amount prong governs, providing approximately $1.07 billion of capacity.

  • Value leakage: The New Notes provide significant flexibility at issuance for value leakage through dividends and transfers to unrestricted subsidiaries. Leverage-based baskets are accessible at issuance with considerable headroom under the applicable leverage tests (4.75x gross total leverage for restricted payments and 4.5x for investments). The company’s gross total leverage ratio at issuance is approximately 2.0x.

  • Quarterly dividends: The New Notes permit quarterly dividends on common stock, up to the greater of $75 million and 35% of EBITDA each fiscal year. Over the life of the notes, this basket potentially permits at least $675 million in dividends (314% of current EBITDA).

  • Gross leverage ratios: The leverage ratio calculations under the New Notes do not permit any cash to be netted from debt.

  • Preferential repayment of pari passu debt with asset sale proceeds: Asset sale proceeds can be used to repay any Issuer or guarantor debt, except payment-subordinated debt, without ratably repaying the New Notes. The repayment provision also does not require repayment of revolving debt to be accompanied by a permanent reduction of revolving commitments.

  • Cross-default / cross-acceleration default allows cure period: Under the cross-default / cross-acceleration provision, an event of default is not triggered unless the subject default or acceleration has not been discharged, cured or rescinded as applicable within 20 business days. More typically, this event of default does not include a cure period.

  • Illusory limit on PJMF debt: A debt basket allows up to $40 million of debt of Papa John’s Marketing Fund Inc. and its subsidiaries, if not recourse to the Issuer or any subsidiary guarantor. However, under the New Notes, these entities are expressly excluded from the definition of “Subsidiaries” and therefore are not subject to the debt covenant, which applies to the Issuer and Restricted Subsidiaries.

  • Possible drafting error - liens securing NGRS debt: A permitted liens basket allows “Liens to secure Debt of any Foreign Subsidiary of the Issuer or any Restricted Subsidiary that is not a Subsidiary Guarantor securing Debt of such Foreign Subsidiary or such Restricted Subsidiary.” This basket may have been intended to cover “Liens on assets of any Foreign Subsidiary of the Issuer or any Restricted Subsidiary that is not a Subsidiary Guarantor securing Debt of such Foreign Subsidiary or such Restricted Subsidiary.” As drafted, the basket arguably permits debt of nonguarantor subsidiaries to be secured by Issuer or guarantor assets.

  • Capped EBITDA addbacks: Permitted adjustments to EBITDA for certain extraordinary or nonrecurring charges (including restructuring, severance and litigation costs), charges relating to cost-saving or restructuring initiatives and projected cost savings are capped in aggregate (for all three categories) at 20% of pre-addback EBITDA. This is an unusually holder-friendly provision. The former two categories are typically uncapped, and projected cost savings are also uncapped in some issuances.

Flexibility Under the New Notes

Papa John’s flexibility under the New Notes is summarized below. At issuance, the New Notes provide significant flexibility to incur additional secured debt, to pay dividends and to transfer assets to unrestricted subsidiaries.

The following table summarizes the presence of certain material holder protections and material aggressive terms included in the New Notes:

--Mitch Oates
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