Mon 12/21/2020 11:23 AM
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Relevant Items:
Covenants Tear Sheet and Debt Document Summaries
Wolverine’ Debt Documents

Wolverine World Wide is a U.S.-based footwear manufacturer based in Rockford, Mich. The company is most well known for Wolverine boots and shoes, as well as other brands, such as Hush Puppies and Merrell. Not unlike other retailers, the company has seen a sharp decrease in sales and earnings as a result of the Covid-19 pandemic, with YTD EBITDA down 48% year over year to $112 million. Continue reading for our Americas Covenants team's analysis of the Wolverine World Wide credit agreement amendments and Request a Trial for access to the linked documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.

The company is the borrower under an $800 million revolving credit facility, a $185 million term loan A facility and a $150 million incremental term loan facility, all executed under the same credit agreement, and is the issuer of $300 million of senior unsecured notes.

The incremental term loan and senior notes were issued in the second quarter to repay outstanding debt under the company’s revolver, which had been drawn to enhance liquidity in response to the coronavirus global economic shutdown.

On its third-quarter earnings call, the company noted that during the quarter it made a “discretionary $21 million term loan payment[, and a]s a result, [it] finished the quarter with $57 million less debt than [it] had at this time last year.” Management went on to disclose that the company had more than $1.1 billion of liquidity at the end of the 2020 third quarter and a “bank-defined leverage ratio” of 2x.

The company’s capital structure as of Sept. 26 is as follows:
Wolverine World Wide capital structure

 
The May Incremental Term Loan

On May 5, the company entered into the second amendment to its credit agreement with a majority of its lenders pursuant to which it incurred $100 million of incremental debt.

Although the initial term loan A and revolver are priced at between L+1.125% and L+2.00% based on total leverage, the incremental term loan is priced at L+2.25%.

While most credit agreements provide initial term loan lenders with most favored nations (or MFN) protection that ensures that any new pari term loan debt will not be priced more than 50 bps higher than the initial term loans, the MFN protection typically only applies to term loan B facilities, not term loan A facilities.

Wolverine World Wide’s credit facilities follows this approach and does not include MFN protection. As such, although the incremental term loan is priced higher than the initial term loan A, initial term loan A lenders do not receive the benefit of higher pricing.

In addition, whereas the initial term loan A and revolver mature on Dec. 6, 2023, the incremental term loans mature on May 4, 2021.

Prior to the May amendment, the definition of “Incremental Term Maturity Date” under the credit agreement was:
“With respect to the Incremental Term Loans to be made pursuant to any Incremental Facility Activation Notice, the maturity date specified in such Incremental Facility Activation Notice, which date shall not be earlier than the final maturity of the Tranche A Term Loans.”

However, the May amendment made the following change to the definition of “Incremental Term Maturity Date:”
“[W]ith respect to the Incremental Term Loans to be made pursuant to any Incremental Facility Activation Notice, the maturity date specified in such Incremental Facility Activation Notice, which date (x) other than in the case of the Incremental Term Loans incurred on the Second Amendment Effective Date, shall not be earlier than the final maturity of the Tranche A Term Loans and (y) in the case of the Incremental Term Loans incurred on the Second Amendment Effective Date, shall be May 4, 2021” (emphasis added).

As is typical, the company’s credit agreement provides that, other than certain “sacred rights,” all amendments to the credit agreement require the consent of a majority of lenders.

The “sacred rights” under the existing credit agreement include (i) amendments that extend the maturity date of any lender’s loans, including any scheduled principal payments; (ii) amendments that alter the pro rata sharing provisions; (iii) amendments that release all or substantially all of the collateral, including amendments “with respect to the order in which the proceeds of Collateral … are applied” or the guarantees; and (iv) amendments that eliminate or reduce the voting rights of any lender under the amendment section.

Although the incremental term loan matures prior to the maturity of the initial term loans and the revolver, it is secured on a pari basis with the other debt under the credit agreement. As such, although, prior to the amendment, the company would have been unable to incur any earlier maturing debt, given no explicit prohibitions, with the consent of a majority of its lenders, the company was able to amend the credit agreement to provide it with the ability to incur such earlier maturing debt.
Covenant EBITDA

Using the company’s disclosure on its earnings call that it had a bank-defined leverage ratio of 2x, we have estimated the company’s covenant EBITDA to be $274 million, rather than its reported $124 million LTM EBITDA, as illustrated below:
Wolverine World Wide Covenant EBITDA

Under the credit agreement and the notes, the definition of “Consolidated EBITDA” includes certain addbacks, including up to $20 million in both 2020 and 2021 for cancellation of inventory due to the Covid-19 pandemic, up to $30 million in any four-quarter period (but not to exceed $100 million in the aggregate) of nonrecurring restructuring and transition costs, up to $25 million of nonrecurring charges in any four-quarter period and up to $15 million in each of 2020 and 2021 for legal costs related to environmental suits and cases (with unutilized amounts not permitted to be carried forward).

Based on implied Covenant EBITDA of $274 million, the secured leverage ratio and interest coverage ratios as of Sept. 26 were negative 0.01x and 6.97x, respectively.
Covenant Conclusions (as of Sept. 26)

Financial covenants - The credit agreement includes two financial maintenance covenants, (i) a 4.5x total leverage ratio and (ii) a 3x interest coverage ratio. As discussed above, the company is currently in compliance with both covenants.

Debt and lien capacity - The company could incur $1.42 billion of additional first lien debt and $125 million of unsecured debt.

Dividend and investments- The company is not currently restricted from paying dividends, making investments or prepaying debt given it can access leverage-based baskets under the credit agreement and notes that require it to meet a 3.5x total leverage ratio.

Open market purchases of the notes - The company is not currently restricted from purchasing its senior notes in the open market. The credit agreement explicitly permits the senior notes to be repaid if the company is in compliance with a 3.25x secured leverage ratio and has liquidity in excess of $150 million; as of Sept. 30, the company was able to meet both of these conditions

Unrestricted subsidiary designations - The company is permitted to designate unrestricted subsidiaries, as long as it is in compliance with the financial covenants and, following the designation, as long as all unrestricted subsidiaries do not have total assets or contribute revenue of 10% or more of consolidated total assets or consolidated revenue.

To the extent all unrestricted subsidiaries ever have total assets or contribute revenue of 10% or more of consolidated total assets or consolidated revenue, the company is required to redesignate certain of those unrestricted subsidiaries as restricted subsidiaries to ensure all unrestricted subsidiaries have total assets and contributed revenue of less than 10% of consolidated total assets and consolidated revenue.

--Maribeth Lemen
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