Fri 04/30/2021 09:10 AM
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Secured, Unsecured Notes Core Analysis

Warburg Pincus-owned Allied Universal is issuing, through Allied Universal Holdco LLC, Atlas LuxCo 4 Sàrl and Allied Universal Finance Corp., four series of secured notes due 2028 (the “Secured Notes”) comprising two series of dollar-denominated notes, one series of euro-denominated notes and one series of sterling-denominated notes, and one series of dollar-denominated unsecured notes due 2029 (the “2029 Unsecured Notes,” and, together with the Secured Notes, the “Notes”). Proceeds are to be used, together with proceeds of a new term loan facility, to fund the acquisition of G4S plc.

Allied Universal’s capital structure as of Dec. 31, 2020, adjusted for the issuance of the Notes and the consummation of the G4S acquisition, is illustrated below.
 

The Notes will be guaranteed by each of Allied Universal’s material wholly owned domestic restricted subsidiaries that guarantee the company’s existing and new senior secured credit facilities and by specified “Issue Date Foreign Subsidiary Guarantors” that include Atlas LuxCo 1 Sàrl, Atlas LuxCo 2 Sàrl, Atlas LuxCo 3 Sàrl, Atlas LuxCo 5 Sàrl, Atlas Luxembourg 3 SCSp, Atlas UK Intermediate Ltd., Atlas UK Parent Ltd., Atlas UK-EUR Ltd. and Atlas UK-USD Ltd. The 2029 Unsecured Notes will also be guaranteed by Atlas LuxCo 4 Sàrl, which is the co-issuer of the Secured Notes.
 

Certain U.S., Luxembourg or England and Wales subsidiaries of Allied Universal, as well as G4S and its material subsidiaries incorporated in the U.S., Luxembourg and England and Wales, will become guarantors on the later of 150 days after issuance and the date on which they provide guarantees under the company’s senior secured credit facilities.

The Secured Notes will be secured on a pari basis with debt under the company’s senior secured term loan and revolving credit facilities on a first lien basis by substantially all assets of the issuers and the guarantors, subject to, in the case of foreign assets, the “Agreed Security Principles” which have not been disclosed. The Secured Notes and the term loan and revolving credit facilities will be secured on a second-priority basis by the company’s current assets that secure its ABL revolving facility on a first lien basis.

A comprehensive report on the Notes is available HERE.
 
‘Ratio Not Worse’ Leverage-Based Investment Basket

The Notes permit unlimited investments if Allied Universal can meet a 5.75x total leverage test or if the total leverage ratio is not worse than the ratio prior to the investment.

By allowing unlimited investments if the pro forma total leverage ratio is not worse than the ratio before the investment, the Notes would allow Allied Universal to access the basket, regardless of whether it can meet the 5.75x total leverage test, to transfer 100% of the equity of any subsidiary that generates negative EBITDA, given that the company’s pro forma total leverage would improve without the negative EBITDA contribution of the transferred subsidiary.

Had PetSmart’s debt documents included this leverage-based investments basket, the company could have transferred 100% of Chewy’s equity to an unrestricted subsidiary, given that, at the time of transfer, Chewy was generating negative EBITDA; a few recent sponsored financings have included this leverage-based investments basket construct, and most of them were revised to delete the “ratio not worse” mechanism.

In any event, because the company’s 5.5x total leverage ratio at issuance will allow it to access its leverage-based investments basket, the Notes will not restrict its ability to make investments, including transfers to unrestricted subsidiaries, at issuance.
 
$1.067B Equity Contribution Provides Day-One Dividend, Investment Capacity

As part of the funding of the G4S acquisition, the sponsors will make a $1.067 billion contribution to the company’s common equity.

Whereas the Notes permit the company to incur secured debt equal to 2x cash contributions and proceeds from equity issuances received after issuance and permit the company to pay dividends and make investments under an “Excluded Contributions” basket based on cash contributions and proceeds from equity issuances received after issuance, they also permit capacity under the 50% of consolidated net income builder basket to increase by cash contributions and proceeds from equity issuances received after July 1, 2019, which lines up with the capacity under the company’s existing secured and unsecured bonds.

Absent any explicit restriction to the contrary, this likely means that the $1.067 billion equity contribution to fund the G4A acquisition will immediately increase available capacity under the builder basket.

The company does not need to meet a leverage or interest coverage test in order to access the builder basket for investments, including transfers to unrestricted subsidiaries, but it must meet a 6.5x total leverage test or a 2x fixed charge coverage test to access it for dividends.
 
Secured ‘Refinancing Indebtedness’

The “Refinancing Indebtedness” basket under the debt covenant, clause (13), has a corresponding liens basket (clause (6) of the “Permitted Liens” definition); this will allow the company to refinance all debt, including unsecured ratio debt, with secured debt.

The initial offering memorandum for Allied Universal’s 2019 note issuances also included a corresponding liens basket that would have allowed all “Refinancing Indebtedness” to be secured, but after investor pushback, it was deleted.
 
Unrestricted Subsidiaries Spinoff Basket

Another one of the changes made to Allied Universal’s 2019 note issuances was modifying the unrestricted subsidiaries spinoff basket to prohibit distributions of the equity of unrestricted subsidiaries that held material IP.

The unrestricted subsidiaries spinoff basket under the Notes does not include this prohibition.
 
Other Prominent Issues

Other prominent issues under the Notes include:
 
  • Debt covenant: could be worse, could be better - The Notes include (i) a credit facilities debt basket that permits fixed amounts based on the company’s outstanding term loans and revolving commitments, plus 100% of EBITDA, plus after all such amounts have been incurred, additional amounts in compliance with a 5.5x secured leverage ratio, and (ii) a leverage liens basket, subject to the same 5.5x secured leverage test and a ratio debt basket, subject to either a 6.5x total leverage test or a 2x coverage ratio.

    The Notes require that outstanding debt under the company’s credit agreements at issuance is deemed incurred under the credit facilities debt basket at issuance and may not be reclassified; given that the company will be able to meet a 5.5x secured leverage test at issuance, without these restrictions governing the credit facilities debt basket (both that the leverage-based component may not be accessed until all other amounts have been incurred and the prohibition on reclassification of outstanding debt at issuance), Allied Universal would likely have been able to reclassify all outstanding credit facility debt as having been incurred as leverage-based debt and, in so doing, would have replenished capacity under all the fixed amounts.

    Nevertheless, the Notes permit the company to incur debt based on most material general-purpose restricted payment baskets, including the annual equity buyback basket, and to incur debt equal to 200% of contributions; all such debt can be secured.
     
  • Asset sale proceeds to fund dividends - Clause (3) of the exceptions to the definition of “Asset Sales” excludes “asset sales, the proceeds of which are used to make such Restricted Payments or Permitted Investments”; this likely will allow Allied Universal to use asset sale proceeds to fund dividends without having to apply any such proceeds toward debt repayments or revinestments.
     
  • “Direct or Indirect” unrestricted subsidiary actions - As is typical, the Notes’ restricted payments covenants restrict Allied Universal and its restricted subsidiaries from making direct or indirect restricted payments; this would typically prohibit the company from transferring assets to unrestricted subsidiaries to enable them to pay dividends or fund debt purchases that the company itself is not otherwise permitted to do.

    However, the Notes also provide that “Unrestricted Subsidiaries may use value transferred from the Company … to purchase or otherwise acquire Indebtedness or Capital Stock of the Company … and to transfer value to the holders of the Capital Stock of the Company … and such purchase, acquisition, or transfer will not be deemed to be a “direct or indirect” action by the Company” (emphasis added).

    As such, transfers to unrestricted subsidiaries will allow Allied Universal to pay a significant amount of indirect dividends through its significant flexibility to transfer assets to unrestricted subsidiaries.
     
  • Guarantee release amendments - Because amendments that release guarantors are not included in the list of amendments requiring all holders to consent, such amendments likely require only majority consent.
     
  • Secured Notes voting - For amendments requiring 50% consent, holders of all series of the Secured Notes will vote as one class unless a proposed amendment affects only one series of Secured Notes, in which case only the holders of that series will vote.
     
  • 103% special redemption - Each series of Secured Notes allows Allied Universal to redeem 10% of each series of Secured Notes in any 12-month period during the make whole period at 103%; the 2029 Unsecured Notes do not include a 103% redemption right.
Flexibility Under the Notes

Allied Universal’s’ flexibility under the Notes is illustrated below:
 

Disclosure: Funds associated with Warburg Pincus hold a majority interest in the parent company of Reorg Research Inc.
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