Secondary Weekly Recap: Liquidity Issues, Covenant Risks, Priming Debt Capacity in Gaming, Retail, Travel Sectors; Top 10 Covenant Areas for Consideration During the Pandemic

With liquidity issues being the central theme of the ongoing coronavirus crisis for many high-yield companies in the market, our Debt Explained lawyers looked back through existing credit agreements and bond documents to set out the key covenant issues borrowers as well as lenders need to know in these uncertain times.

As part of our Navigating Uncertainty series, we compiled a checklist of 10 areas for consideration when reviewing documents during the coronavirus crisis. Areas include springing financial covenants, the ability to draw down under available facilities, defaults, and raising liquidity through new priming debt.

Navigating Uncertainty: Top 10 Areas for Consideration in Leverage Finance Docs Amid Coronavirus Outbreak
 
Governments around the world are responding to coronavirus with actions that range from market interventions - slashing rates, expanding quantitative easing and opening crisis-era emergency lending facilities - to restrictions on citizens’ freedom of movement.

Governments are also broadening their policy toolkits and considering more direct company and industry-specific actions, ranging from the provision of debt and equity to the discussion of previously taboo policies including nationalization.

Our New York and London-based lawyers and analysts looked at the interplay between such expansive forms of intervention and the rights of creditors and other financial stakeholders.

Global Legal Analysis: Covid-19, Nationalization and Creditors Rights - Key Considerations Across Sectors and Jurisdictions
 
High yield investors are paying attention to issuers’ capacity to incur debt with a higher ranking such as super senior debt, an option that Pizza Express and Selecta exercised in the last few weeks.

Raising priming debt to increase liquidity will be relevant in the gaming industry, where Covid-19 has led retail operations to close and sports betting businesses to come under pressure due to the cancellation of major events. In this context, our lawyers reviewed super senior debt headroom for Codere, Cirsa, Gamenet, Olympic Entertainment, Lowen Play and Playtech.

Earlier this month, our lawyers discussed the option of incurring additional super senior debt for retailers Hema, Matalan, Takko and Maxeda. As stores are shuttered and retailers run into liquidity issues, normal routes of financing are possibly closed or very expensive.

Gaming Companies Face Liquidity Squeeze on Covid-19 Crisis

Hema, Matalan, Maxeda, Takko Bonds Allow Additional Super Senior Debt to Potentially Raise Liquidity as Covid-19 Impact Pressures Retailers
 
Financial covenant considerations are becoming increasingly relevant as the pandemic continues to affect the global economy. U.K.-based foreign exchange company Travelex is on the brink of a covenant default under its revolver, as its first-quarter EBITDA fell by €25 million year over year, while the potential insolvency of its holding company Finablr has tarnished hopes of support from the sponsor. Our restructuring lawyers examined the restructuring options for Travelex, including options to ease the liquidity squeeze.

Travelex to Negotiate RCF Covenant Waiver, Requires New Money to Ease Immediate Liquidity Squeeze, Longer-Term Restructuring Options Include Notes Amend and Extend, Partial/Full SSN Equitization; Potential for Notes to Own Strategy
 
With the recently-announced “Coronavirus Business Interruption Loan Scheme” (CBILS) in the U.K., our Debt Explained lawyers set out to look at the implications of the new debt for the existing regime on director’s duties. Under the new rules, lenders can provide small and medium enterprises facilities of up to £5 million that will be guaranteed up to 80% by the British government, which will pay the interest for the first six months. At the same time, there is also a new short-term lending scheme to be provided by the Bank of England - the “Covid-19 Corporate Financing Facility” (CCFF) - which will support investment-grade entities that make a material contribution to the U.K. economy. The CCFF will purchase commercial paper of up to one year maturity and help businesses across a range of sectors to pay wages and suppliers.

The U.K. government has announced that the UK’s insolvency regime will add new restructuring tools including: i) a moratorium for companies giving them breathing space for from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure; ii) protection of their supplies to enable them to continue trading during the moratorium; and; iii) a new restructuring plan, binding creditors to that plan. No exact timeline has been provided as to enactment.

The government has announced that it will also temporarily suspend the wrongful trading provisions of the insolvency regime to give company directors greater confidence to use their best endeavours to continue to trade without the threat of personal liability should the company ultimately fall into insolvency. The government expects that the existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct.

English Company Directors Duties
 
In a short Covenant Conversations podcast, Reorg’s senior lawyers discussed the legal issues businesses are facing in assessing liquidity and their revolvers amid the massive spike in global volatility caused by coronavirus.

Reorg also recapped the coronavirus impact this week on high yield bonds, leveraged loans, BWICs with a focus on debt collectors.

This week’s Covenant Conversations podcast can be found HERE, while the Coronavirus Impact Recap can be found HERE.