Advanced Negotiation & Structuring Issues in High Yield Bonds

Course Overview:

The European High Yield Bond market has come of age and 2013 has seen record issuance of $46 billion by November with corporates dominating PE issuance slightly. Significantly, the bond markets are opening to much smaller issues than was historically the case as yield-hungry investors are increasingly willing to sacrifice liquidity for yield, the recent £115 million Soho House deal being an excellent example.

Strong investor demand also explains the acceptance, by investors, of increasingly aggressive terms in the Indenture which amplify the benefits of the incurrence covenants in bonds. Additionally, the evolution of bi-furcated Loan / Note structures has introduced an additional dimension of complexity.

Borrowers familiar with the typical maintenance covenant package found in loans, are often pleasantly surprised much higher degree of operational flexibility available from the incurrence covenant package found in bonds which permits borrowers a much wider range of corporate actions than loans such as incurring additional debt, paying dividends, M&A, making capital investments but only if the borrower can demonstrate improved financial performance at the time of the proposed action or event. For investors used to the comfort and protection inherent in the maintenance covenants in loans, this flexibility comes as a nasty surprise.

For both parties it is essential that they understand not only the basics but also the key battlegrounds in current dynamic market conditions. For example, Tank & Rast’s second lien notes allow unlimited dividend distribution once leverage is reduced to 6.0x. Issuers wage a continuous battle of pushing for additional flexibility; debt incurrence and the restricted payments basket are the two most obvious examples but, recently, the battleground has shifted to asset sales with issuers finding increasingly creative ways to use assets sale proceeds to pay dividends.

This programme provides a toolkit for issuers, investors, advisors and others seeking to understand the key aspects of bonds particularly how they differ from loans. It analyses the standard covenants in the Notes but also focuses on the current topical negotiating areas in the covenant package. For Issuers, the programme identifies the key structuring & documentary issues to ensure that they are able to achieve maximum operational flexibility post issuance. It also provides some guidance on what is required to be able to access the capital markets.

For Investors, the programme provides a risk template to identify, understand and mitigate the key risk areas of the deal; in particular which covenants matter most. Whilst the restricted payments basket and debt incurrence covenants will always be at the forefront of negotiations, other aspects will depend on the circumstances of each case.

During the programme, current aggressive market trends will be illustrated with reference to extracts from Offering Memoranda and selected data from DebtXplained (the key provider of information to the European high yield community) will provide guidance on what is, and is not, market standard.

Case Studies:

Participants will be required to (1) analyse the pros and cons of various structures currently used in the market (2) identify some of the key areas of value leakage and (3) discuss the role and impact of subordination

Course Content:

Summary of the key terms of High Yield Notes

• High yield Funding spectrum; Senior Loans, Notes (senior & junior), Mezzanine, 2nd Lien & PIK
• Types of Notes & coupons: Fixed & FRNs
• Typical yields & maturities
• Which Companies can access the market: market considerations
  • Typical Debt capacity metrics
  • Issue size
  • Other market-related factors
  • Small is beautiful?
• Reporting requirements, Offering venue & Listing & Credit ratings

A template for risk assessment

• Review of Corporate and Financing Structure
  • The Restricted Group – why and how it matters (q.v Bakkavor)
  • How/when can Restricted Subsidiaries become Unrestricted
  • Jurisdiction of Guarantors, Issuer, Borrowers
  • Impact on recovery in distress (q.v. Thomas Cook)
  • Use of proceeds
• Subordination to other (Senior / existing) debt (Hapag)
• Overview of the key areas of the Covenant package
  • Limits on Debt: Ratio Debt Basket & Permitted Debt baskets
  • Security & Subordination (Liens)
  • Value Leakage

Review of topical negotiating areas / aggressive terms in 2013

• Leverage / coverage risk
  • EBITDA add-backs
  • Increasing basket flexibility
• Value Loss, Dividends, Sales
  • Restricted Payments / Permitted investment reclassification
  • Asset sales leakage
  • Sponsor fees / (q.v SSB Telemach)
• Dilution / Subordination
  • Permitted lien capped baskets
  • Reclassification between permitted Liens and Permitted collateral Liens
• Redemption & Portability
  • Now approaches
  • Permitted Holder issues
• PIK & Subordinated debt issues
  • PIK toggles
  • Midco carve-outs

Limitations on Debt (Ratio Debt basket & the Permitted baskets)

• Limitation on Debt / Ratio Debt Basket: key ratios & issues
  • Fixed Charge Cover & Coverage ratio:
    • Constituents & range
    • Which Group companies can use: (typical inclusions & exclusions, non-Guarantor subs)
  • Leverage & Secured Leverage ratio
    • Constituents of the ratios and typical range in market
  • The various Permitted Debt (“Capped”) “baskets”
  • Summary of the various baskets (Liens, Collateral Liens, Restricted Payments, Permitted Investments)
  • Baskets & why they matter
  • Approach to “capping”
• What to look for at the outset
• Issues to watch
  • EBITDA add-backs (summary)
  • Debt reclassification issues (q.v. Phones4u, Ontex, Kabel BW)
  • Other topical issues re the baskets “dumping”, “one-time” vs “revolving” baskets
  • Payment waterfall & Hedging issues
• Maintenance covenants in High Yield Notes (e.g. BAA & Anglian Water)

Key Accounting definitions & impact on covenants

• Definition of Indebtedness
  • Typical exclusions: Operating Leases & related issues (Fixed or Frozen GAAP)
  • Unusual exclusions
• Definition of EBITDA & related issues
  • The categories of add-backs
  • EBITDA add-backs per Management “discretion” vs. GAAP/IFRS compliance
  • Pro-forma adjustments in M&A
    • The 5 categories
    • Management “good faith” test

Security, Liens, Guarantees & Subordination

• The main issues
  • Security package generally
  • Topical issues: CoMI & Restructuring
  • Guarantees & issue of Non-Guarantors
  • Liens, Permitted Liens & Permitted Collateral Liens
• What to look for at the outset
• Issues to watch
  • Refinancing debt issues
  • Liens: equal or rateable
  • Review Guarantor & non-guarantor issues

Value leakage:

• The Restricted Payments basket: who & what is covered
• What to look for at the outset
  • Build-up basket
  • Carve-outs
  • Build-up basket issues (q.v. Eco-Bat)
  • Valuation issues (Fair Market Value)
  • Non-cash considerations
  • Payment waterfall (sales)
• Affiliates Transactions (sweetheart deals)
  • When are they relevant
  • Key areas of leakage
• Permitted Investments
• Asset Sales: the new battleground
  • The main area of leakage
  • Other aspects where leakage can occur

Call protection: Change of control & Equity Claw

• The “historical” Change of Control (CoC) position
  • The “portability” issue – the 3 variations on the standard CoC position
  • Topical cases: Ziggo, Odeon, Com Hem, Hastings
• Standard call protection (absent CoC)- Fixed vs FRNS
• “Equity Claw”
  • Investor issues
  • Issuer matter

What our clients are saying about the course

“Provided an in-depth knowledge of High Yield documentation & the types of issues to be taken into consideration”

“A lively & focused course with a good impact from real life cases”

“A broad overview, strongly presented & highly relevant”

“Very current and relevant to market conditions and terms. The course simplifies high yield in a coherent and understandable way but also focuses on complicated aspects and current trends in market”