It’s hard to keep up with all the new issuance, let alone the terms in those deals that could be detrimental to one’s investment. In a new report Xtract Research highlights provisions from January’s high yield bonds which may give many investors pause.
Q4 2020 hedge fund letters, conferences and more
Provisions You Need to Know From January’s High Yield Bonds
Highlights from the report include:
Truck Hero’s Senior Notes contain no restriction on reclassifying outstanding Term Loan borrowings ($1.55B) out of the credit facility basket when it can meet the ratios.
NGL issued notes that in one respect were far tighter than most deals, as the covenants include protections against early repayment of existing senior notes and antilayering provisions for liens and payment subordination that would limit "first out" debt to $25mm. However, reclassification risk exists that could allow for emptying of the credit facilities basket, as the outstanding ABL debt and notes issued on the issue date are "initially… deemed to have been incurred on such date" under the credit facilities basket. It does not require, as it should, that such debt may not be later reclassified.
This problem even exists in high yield lite bonds. In Crowdstrike’s Senior Notes while there is no debt covenant, there is nothing in the liens covenant that mandates that secured bank debt be incurred under the $1B credit facilities lien basket, and any liens that actually are incurred under that basket can be reclassified away from it.
The PetSmart and Park River deals include an expansion of the similar business definition that we have been seeing from time to time, since PetSmart’s alleged use of the basket (when it started moving part of Chewy out of the credit and into an Unrestricted Subsidiary (and also another portion to its sponsor)).
