In a new special report Xtract Research highlights some things you may have missed in May’s high yield bonds.
Q1 2021 hedge fund letters, conferences and more
May's High Yield Bonds
Highlights from the report include:
One noteworthy deal is that of DT Midstream. Its debt and lien regime appears to contain limits on secured debt, but it is illusory. The covenants are essentially worthless, because the permitted lien carveout for Credit Facilities permits any "Credit Facility" to be secured, regardless of what debt exception is used (including the 2x FCCR or even refinancing debt). As a result, any permitted debt can be secured.
We see more and more bonds adopt leveraged based step downs to the asset sale covenant, permitting the issuer to divert asset sale proceeds to equity if specified leveraged tests are met. The secured (and unsecured) bonds of SRS Distribution include another weakness not often seen in high yield bonds, but one seen with increasing frequency in leveraged loans: the exclusion of sales of non-collateral assets from the asset sale covenant.
The Affiliate Transactions covenant, which in theory protects against sweetheart deals between the issuer and its affiliates— including sponsor—has been pretty weak for years. While most of these covenants still require some sort of BOD approval for larger transactions with affiliates, we continue to see deals which permit the board of any parent company of the issuer to approve the affiliate transaction, including the deals of MajorDrive Holdings and Garda World Security.
Two deals last month included permitted holder carveouts so broad that they could gut the change of control put.
