Rayonier Advanced Materials
Rayonier Avoids a Covenant Breach, but Its Amended Credit Agreement Drastically Reduces Its Ability to Deleverage, Transfer Assets, Pay Dividends
Mon 10/14/2019 15:58 PM
Relevant Items:
Rayonier Covenants Tear Sheet and Debt Document Summaries on Reorg Analysis Page
Rayonier Debt Documents
Facing a potential covenant breach, Rayonier entered into an amendment to its credit agreement that “addresses the current challenging commodity markets, provides enhanced financial flexibility through 2021 and allows us to avoid the potential covenant breach that led to the going concern disclosure in our second quarter financial statement.”
This article provides an overview of Rayonier’s amendment and illustrates that, although there is no longer a risk of breaching the financial maintenance covenants under the credit agreement, the company’s flexibility, including its ability to address its 2024 senior unsecured notes, has been significantly reduced.
The following chart summarizes the company’s ability to consummate certain transactions as of March 31 and as of June 30, adjusted for the Sept. 30 amendment.
Rayonier announced on Sept. 30 that its lenders had agreed to certain amendments under its senior secured term loan and revolving credit facility (the “Credit Agreement”). According to the company, the amendment:
The announcement follows an Aug. 1 announcement that the company had agreed to sell its Matane, Quebec, pulp mill and related assets to Sappi Ltd. for a purchase price of approximately US$175 million. On its second-quarter earnings call, the company noted that the sale:
Rayonier’s capital structure as of June 30 is illustrated below for reference.
In light of the amendment and the Matane sale, we discuss the company’s flexibility under the Credit Agreement to continue to reduce debt, focusing on its ability to purchase its 2024 senior unsecured notes in the open market and to consummate additional asset sales.
We note that, prior to the amendment, the company’s debt documents did not restrict it from purchasing its senior unsecured notes in the open market, and that the company could likely use a portion of asset sale proceeds to indirectly fund additional purchases of the unsecured notes.
The following chart illustrates changes in certain basic terms under the Credit Agreement.
As illustrated above, revolving commitments under the company’s USD and multicurrency revolving facilities have decreased, pricing on the term loans and revolver has increased, the guarantee and security package now includes certain Canadian subsidiaries and assets, and Rayonier must try to ensure that multicurrency revolving usage as a percentage of multicurrency commitments may not exceed or be less than USD revolving usage as a percentage of USD commitments by more than $2 million; the company is also no longer able to acquire term loans.
Prior to the amendment, the Credit Agreement required Rayonier to comply with a 3x first lien leverage ratio (switching to a 3.5x total leverage ratio upon the achievement of specified ratings) and 3x interest coverage ratio.
After the amendment, as illustrated below, Rayonier must not only meet loosened first lien and interest coverage test but must also ensure that availability under its revolver is never less than $80 million or $90 million.
Although Rayonier was in compliance with the original financial maintenance covenants as of June 30, given that its $29 million of EBITDA for the first six months of 2019 represents a 73% decline from the $106 million of EBITDA the company generated in the first six months of 2018, the company would likely have been unable to remain in compliance absent significant EBITDA improvement or debt reduction.
Similarly, the company’s interest coverage ratio declined to 3.7x as of June 30, compared with 5x as of March 31.
The following chart illustrates changes in Rayonier’s ability to incur debt and liens, purchase the 2024 senior unsecured notes in the open market and make restricted payments and dividends under the Credit Agreement made by the amendment.
Prior to the amendment, because the Credit’s Agreement’s prepayment covenant only restricted it from prepaying payment subordinated debt, Rayonier was not restricted from purchasing its 2024 notes in the open market. However, after the amendment, the prepayment covenant was expanded to include restrictions on prepayments of any unsecured debt.
The amendment also prohibits the company from accessing a builder basket based on 50% of consolidated net income and that also includes a $150 million starter basket and reduces capacity under a shared restricted payment and prepayment basket; Rayonier is currently permitted to purchase only $5 million of 2024 notes under the Credit Agreement.
Although Rayonier would have been permitted to incur at least $450 million of additional pari secured debt under the Credit Agreement, after the amendment, it can incur $35 million of pari secured debt, plus an additional $15 million if it can comply with a 4x first lien leverage ratio.
Investments
Although the amendment also reduced Rayonier’s ability to make investments, the company continues to have some flexibility. In addition to $40 million of general investments, which can increase to $55 million if the company can meet a 4x first lien leverage test, the company can also make $25 million of investments in non-guarantor foreign subsidiaries, $25 million in joint ventures and an additional $10 million of investments in certain forestry joint ventures.
While the $25 million of joint venture investment capacity could also be used for investments in unrestricted subsidiaries, the company is not permitted to designate unrestricted subsidiaries after the amendment; nevertheless, to the extent the company has previously designated an unrestricted subsidiary, it would be permitted to transfer at least $65 million of assets to such previously designated unrestricted subsidiaries, including by utilizing the $40 million general investments basket.
Asset Sales and Mandatory Prepayments
After the amendment, Rayonier can consummate only $150 million of additional asset sales and, although the company can reinvest up to $20 million of asset sales in the business, all other proceeds will be required to be used to prepay the term loans.
In addition, upon receipt of the proceeds from the Matane sale, the company must use the first $100 million to prepay the term loans and may retain the next $50 million to be used for any permitted purpose under the Credit Agreement, with the remaining proceeds permitted to either prepay the term loans or to reinvest in the business.
Rayonier Covenants Tear Sheet and Debt Document Summaries on Reorg Analysis Page
Rayonier Debt Documents
Executive Summary
Facing a potential covenant breach, Rayonier entered into an amendment to its credit agreement that “addresses the current challenging commodity markets, provides enhanced financial flexibility through 2021 and allows us to avoid the potential covenant breach that led to the going concern disclosure in our second quarter financial statement.”
This article provides an overview of Rayonier’s amendment and illustrates that, although there is no longer a risk of breaching the financial maintenance covenants under the credit agreement, the company’s flexibility, including its ability to address its 2024 senior unsecured notes, has been significantly reduced.
The following chart summarizes the company’s ability to consummate certain transactions as of March 31 and as of June 30, adjusted for the Sept. 30 amendment.
Background
Rayonier announced on Sept. 30 that its lenders had agreed to certain amendments under its senior secured term loan and revolving credit facility (the “Credit Agreement”). According to the company, the amendment:
“[A]ddresses the current challenging commodity markets, provides enhanced financial flexibility through 2021 and allows us to avoid the potential covenant breach that led to the going concern disclosure in our second quarter financial statements. … We believe we now have the runway to manage the business through these challenging economic conditions, enabling us to emerge financially stronger and able to realize the earnings potential of our business” (emphasis added).
The announcement follows an Aug. 1 announcement that the company had agreed to sell its Matane, Quebec, pulp mill and related assets to Sappi Ltd. for a purchase price of approximately US$175 million. On its second-quarter earnings call, the company noted that the sale:
“[N]ot only narrows our focus to our core HPC business and mitigates some commodity volatility; it also better positions us to reduce net debt and improve leverage ratios.”
Rayonier’s capital structure as of June 30 is illustrated below for reference.
In light of the amendment and the Matane sale, we discuss the company’s flexibility under the Credit Agreement to continue to reduce debt, focusing on its ability to purchase its 2024 senior unsecured notes in the open market and to consummate additional asset sales.
We note that, prior to the amendment, the company’s debt documents did not restrict it from purchasing its senior unsecured notes in the open market, and that the company could likely use a portion of asset sale proceeds to indirectly fund additional purchases of the unsecured notes.
Basic Terms
The following chart illustrates changes in certain basic terms under the Credit Agreement.
As illustrated above, revolving commitments under the company’s USD and multicurrency revolving facilities have decreased, pricing on the term loans and revolver has increased, the guarantee and security package now includes certain Canadian subsidiaries and assets, and Rayonier must try to ensure that multicurrency revolving usage as a percentage of multicurrency commitments may not exceed or be less than USD revolving usage as a percentage of USD commitments by more than $2 million; the company is also no longer able to acquire term loans.
Financial Maintenance Covenants
Prior to the amendment, the Credit Agreement required Rayonier to comply with a 3x first lien leverage ratio (switching to a 3.5x total leverage ratio upon the achievement of specified ratings) and 3x interest coverage ratio.
After the amendment, as illustrated below, Rayonier must not only meet loosened first lien and interest coverage test but must also ensure that availability under its revolver is never less than $80 million or $90 million.
Although Rayonier was in compliance with the original financial maintenance covenants as of June 30, given that its $29 million of EBITDA for the first six months of 2019 represents a 73% decline from the $106 million of EBITDA the company generated in the first six months of 2018, the company would likely have been unable to remain in compliance absent significant EBITDA improvement or debt reduction.
Similarly, the company’s interest coverage ratio declined to 3.7x as of June 30, compared with 5x as of March 31.
Negative Covenant Package Under the Amended Credit Agreement
The following chart illustrates changes in Rayonier’s ability to incur debt and liens, purchase the 2024 senior unsecured notes in the open market and make restricted payments and dividends under the Credit Agreement made by the amendment.
Open Market Purchases of the 2024 Notes
Prior to the amendment, because the Credit’s Agreement’s prepayment covenant only restricted it from prepaying payment subordinated debt, Rayonier was not restricted from purchasing its 2024 notes in the open market. However, after the amendment, the prepayment covenant was expanded to include restrictions on prepayments of any unsecured debt.
The amendment also prohibits the company from accessing a builder basket based on 50% of consolidated net income and that also includes a $150 million starter basket and reduces capacity under a shared restricted payment and prepayment basket; Rayonier is currently permitted to purchase only $5 million of 2024 notes under the Credit Agreement.
Debt and Liens Capacity
Although Rayonier would have been permitted to incur at least $450 million of additional pari secured debt under the Credit Agreement, after the amendment, it can incur $35 million of pari secured debt, plus an additional $15 million if it can comply with a 4x first lien leverage ratio.
Investments
Although the amendment also reduced Rayonier’s ability to make investments, the company continues to have some flexibility. In addition to $40 million of general investments, which can increase to $55 million if the company can meet a 4x first lien leverage test, the company can also make $25 million of investments in non-guarantor foreign subsidiaries, $25 million in joint ventures and an additional $10 million of investments in certain forestry joint ventures.
While the $25 million of joint venture investment capacity could also be used for investments in unrestricted subsidiaries, the company is not permitted to designate unrestricted subsidiaries after the amendment; nevertheless, to the extent the company has previously designated an unrestricted subsidiary, it would be permitted to transfer at least $65 million of assets to such previously designated unrestricted subsidiaries, including by utilizing the $40 million general investments basket.
Asset Sales and Mandatory Prepayments
After the amendment, Rayonier can consummate only $150 million of additional asset sales and, although the company can reinvest up to $20 million of asset sales in the business, all other proceeds will be required to be used to prepay the term loans.
In addition, upon receipt of the proceeds from the Matane sale, the company must use the first $100 million to prepay the term loans and may retain the next $50 million to be used for any permitted purpose under the Credit Agreement, with the remaining proceeds permitted to either prepay the term loans or to reinvest in the business.
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