Mon 11/22/2021 08:51 AM
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Relevant Items:
LifeScan’s 2026 Secured Notes Core Analysis
2026 Secured Notes Offering Memorandum

On Oct. 18, Platinum Equity Advisors-owned LifeScan began marketing $800 million of fixed and floating-rate senior secured notes due 2028, with proceeds to be used to refinance the company’s outstanding debt.

LifeScan’s capital structure as of July 4, adjusted for the issuance of the 2028 secured notes, is illustrated below.

As of Friday, Nov. 19, the notes have still not been priced. Some sources have suggested that the deal is possibly being recut because of lukewarm demand on the term loan side and scant interest in the bond offering from market participants stemming from covenants being discussed that are weaker than what is palatable for investors. Sources said the company needs to offer better terms for the deal and provide more clarity as to when LifeScan’s oft-delayed glucose monitoring tool will hit the market. LifeScan’s CGM product is slated to hit the market in 2023, according to sources, who added that the company has been losing top and bottom line to key competitors that have launched continuous glucose monitoring products of their own.

LifeScan is at least the sixth Platinum-backed issuer to come to the high-yield market in 2021, following issuances by Ingram Micro, Club Car, McGraw Hill, Solenis and Vertiv.

Although the terms of McGraw Hill’s issuance had to be tightened after successful investor pushback, each of the Platinum issuances prior to LifeScan were able to price in line with their initial timelines.

In this article we compare the proposed terms of LifeScan’s notes with those under each of the prior Platinum issuances and compare the terms generally under all of the Platinum issuances with those under other recent sponsored issuances from Medline (Blackstone), AOC (Lone Star) and Equiniti (Siris).

Not only do LifeScan’s notes provide LifeScan with significantly less flexibility than each of the other Platinum issuances from 2021, as a group, the Platinum issuances have provided significantly less flexibility than other sponsored issuances this year.
The 2026 Secured Notes

Flexibility Under the 2026 Secured Notes

LifeScan’s flexibility to incur additional first lien debt and structurally senior debt, to transfer assets to unrestricted subsidiaries and to pay dividends under the 2026 secured notes is illustrated below.

 
Notable Provisions

Notable provisions under LifeScan’s 2026 secured notes include:

  • Super senior debt capacity - Up to $175 million of debt, including debt under LifeScan’s revolving credit facility, can be repaid ahead of the 2026 secured notes and debt under the company’s term loan with collateral proceeds in a bankruptcy or insolvency proceeding.



  • Asset sale sweep could allow for repayments of other pari lien debt ahead of the 2026 secured notes: The asset sale covenant permits LifeScan to use asset sale proceeds to:“[R]epay (i) Parity Lien Indebtedness, including the Notes, (ii) First-Out Debt or (iii) if the assets or property disposed of in the Asset Sale were not Collateral, unsecured Indebtedness and other unsecured obligations of the Issuer or a Guarantor that rank pari passu with the Notes or such Guarantor’s Note Guarantee … provided that if the Issuer … shall so reduce Indebtedness other than the Notes, [it must ratably repay the 2026 Secured Notes]” (emphasis added).It is not clear whether the “Indebtedness” highlighted above refers to any debt under clauses (i), (ii) and (iii) or whether it just refers to debt under clause (iii).If it is meant to refer to debt under any of the clauses, that could cause problems under outstanding first-out debt which, presumably, would require mandatory prepayments ahead of other first lien and non-first-out debt; as such, we interpret the reference to “Indebtedness” to refer only to debt under clause (iii).

    If this is correct, this would result in LifeScan being able to use asset sale proceeds to repay other “Parity Lien Obligations” without having to ratably repay the 2026 secured notes.

  • Larger general-purpose restricted payments, builder basket baskets - Whereas the 2026 secured notes include baskets for investments in unrestricted subsidiaries, permitted businesses and “joint ventures” not to exceed the greater of $50 million and 11% of EBITDA, they also include a general-purpose restricted payments basket and a starter basket under the 50% of consolidated net income-based builder basket not to exceed the greater of $50 million and 15% of EBITDA.At issuance, the three investment baskets will provide LifeScan with $50 million of capacity, while the general-purpose restricted payments basket and the builder basket’s starter basket will provide it with $69 million of capacity.

  • 10% at 103% redemption - During the make whole period, LifeScan may redeem up to 10% of any series of 2026 secured notes during each calendar year at 103%.


Holder Protections, Aggressive Terms Comparison

Although none of the six Platinum issuances from 2021 include limitations or prohibitions on transferring material IP to unrestricted subsidiaries, each of the issuances, other than Vertiv’s notes, include anti-PetSmart guarantor protections pursuant to which subsidiary guarantors that become non-wholly owned subsidiaries will not be released from their guarantees unless the underlying transaction had a bona fide business purpose and did not involve a transfer of equity to an affiliate.

The notes also generally do not include many of the aggressive terms and mechanics that are gradually becoming common in sponsored issuances, including (i) permitting debt utilizing restricted payments capacity, (ii) allowing “ratio not worse” leverage-based investments and (iii) reducing the percentage of asset sale proceeds that are subject to asset sale sweeps based on pro forma secured or total leverage.

Although Solenis’, Club Car’s and Ingram’s notes permitted EBITDA to be increased by uncapped cost savings and Ingram’s notes permitted leverage-based dividends and investments, subject to meeting pro forma first lien leverage tests, the Platinum-backed issuances, when compared with the terms under Medline’s, AOC’s and Equiniti’s notes, include noticeably fewer aggressive provisions.

Whereas Equiniti and Medline were able to access their leverage-based investments baskets at issuance, each of the Platinum issuers are, or will be, required to deleverage in order to access their leverage-based investments baskets.

AOC’s and Medline’s notes permitted the issuers to incur additional debt utilizing restricted payments capacity, while none of the Platinum issuances from 2021 gave issuers this option.
Basket Capacities Comparison

Negative covenant baskets under each of the issuances provide capacity under grower baskets based on the greater of a fixed amount and a percentage of EBITDA.

As illustrated below, with the exception of the cash-capped grower basket included in each of the notes’ secured credit facilities debt baskets and the ESG debt basket, the EBITDA component of each basket under LifeScan’s notes is significantly less than the same component in each of the other five Platinum issuances.

When compared with the corresponding baskets under Medline’s, AOC’s and Equiniti’s notes, LifeScan’s baskets, as well as each of the other Platinum-backed issuances, provide materially less flexibility.

 
Leverage-Based Baskets Comparison

Each of the Platinum secured issuances (which do not include Club Car’s unsecured issuance), including LifeScan’s notes, permit the issuers to incur additional first lien debt, subject to meeting specified first lien leverage test and junior lien debt, subject to meeting specified secured leverage tests.

Each of the notes also permit the issuers to pay unlimited dividends and make unlimited investments, including transfers to unrestricted subsidiaries, subject to meeting specified leverage tests, and allow the issuers to access their 50% of consolidated net income-based builder baskets, subject to meeting looser specified leverage tests.

As illustrated below, LifeScan’s notes generally require the company to meet tighter tests than are required under the other Platinum notes.

For instance, whereas LifeScan can incur additional leverage-based first lien debt if it can meet a pro forma 3.3x first lien leverage test, Solenis’ and McGraw Hill’s notes permit leverage-based first lien debt, subject to compliance with a 5.1x first lien leverage ratio and 4.05x first lien leverage ratio, respectively.

Similarly, LifeScan can pay unlimited dividends and make unlimited investments if it can meet a pro forma 2.3x total leverage test; Solenis and McGraw Hill can pay unlimited dividends and make unlimited investments if they can meet a 5.25x total leverage test and 4.3x total leverage test, respectively.
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