In a new special report, Xtract Research reviews a few noteworthy provisions from June’s high yield bonds.
Q2 2021 hedge fund letters, conferences and more
Highlights Of June's High Yield Bonds
Highlights from the report include:
The builder basket in PRA Health’s new notes builds in the following way: 50% of CNI since the first day of the FQ in which the Issue Date occurs, plus other typical amounts, plus a starter amount, plus declined asset sale proceeds, plus subordinated debt repayments.
Back in 2019 several issuers attempted to use a leverage no worse test for investments, which would have allowed an issuer to spin out a negative EBITDA business with no RP capacity needed, a weaker standard than the typical ratio investment test which requires that pro forma for the transaction a specified leverage test be met. After a few swings and misses, the provision finally survived in a drive-by deal by Restaurant Brands International Inc (NYSE:QSR), and since then has been seen in a number of sponsor deals.
In its recent bonds, At Home Group Inc (NYSE:HOME) provided itself with maximum flexibility, essentially combining all of the above: unlimited investments in anything—including unrestricted subsidiaries—are allowed subject to meeting a 5x Consolidated Total Debt Ratio or a 2x FCCR or those ratios are not worse than prior to the transaction.
Permitted refinancing debt exceptions are standard in debt covenants, and the incurrence of permitted refinancing debt—debt, the proceeds of which is used to take out, substantially concurrently, existing debt, so long as the new debt is not in a greater amount of the original debt, does not have additional obligors or better payment priority and has a longer WALM—is normally not controversial. If the new debt complies with these parameters, then no basket capacity is needed. However, we sometimes see a tweak to the definition which adds flexibility to this exercise by turning the concept of substantially contemporaneous on its head (not to mention defying common sense).
The new notes of Madison IAQ include a different way to add timing flexibility, by allowing debt incurred AFTER debt has already been repaid to nevertheless constitute permitted refinancing debt in respect of that already paid off obligation.
