In the latest Xtract Research special report on covenant trends, we take a look at RP Debt baskets in bonds and loans.
Q2 2021 hedge fund letters, conferences and more
RP Debt Baskets Now Appear Often In High Yield Bonds
Highlights from the report include:
RP debt baskets (originally seen in large sponsor loans and now appear often in high yield bonds as well) allow the issuer/borrower to repurpose its RP baskets and exceptions for debt incurrence. However, all RP debt baskets are not created equal.
Year to date, 20.2% of high yield bonds and 38.2% of loans reviewed by Xtract’s lawyers include an RP debt basket of some sort. Given that these provisions have a longer history in the leveraged loan market, it is not surprising see them with greater frequency in loans.
Overwhelmingly, this is sponsor technology—93% of high yield bonds with the feature are sponsor deals and 99% of loans with the feature are sponsor deals. It really has not found its way into corporates (yet).
By and large, RP Debt baskets do not require that the issuer actually have the wherewithal to make the RP under a basket, only that the capacity under the basket has not previously been utilized—capacity under then contract.
The RP debt exception is typically usable by any Restricted Subsidiary, even one that does not provide credit support. Thus, it can be utilized for the incurrence of structurally senior debt, by a foreign restricted subsidiary, for example.
A Hidden Danger in Secured RP Debt Baskets: When the Ratio Lien Provision is Just an Illusion This is a sneaky but powerful loophole in the secured RP Debt basket variation.
