In a new report Xtract Research examines some things you may have missed in February’s high yield bonds.
Q4 2020 hedge fund letters, conferences and more
Takeaways From February's High Yield Bonds
Highlights from the report include:
Debt And Lien Traps Increase Secured Debt Capacity
Vista Outdoor and NGL Energy Partners both contain an easy to miss lien loophole that, when used in tandem with a liberal debt reclassification regime, can be used to increase secured debt capacity in a dramatic way. This is not new, but it is more often seen in Oil and Gas bonds than other sectors.
Each deal fails to carve out the credit facility from the issue date liens exception, which grandfathers in all liens securing not just drawn bank debt but revolving commitments in existence at issuance, even if they are not drawn on the issue date.
Protection Against Layering Gone Wild
Our monthly reports typically include only terms which benefit issuers and sponsors. NGL’s Split Collateral Notes (second lien on ABL priority collateral; first lien on all other assets) include one which benefits investors: anti-layering lien subordination protection. Many bonds include protection against anti-layering payment subordination-debt that is junior in right of payment to other senior debt but senior to the subject bond (but this is really never relevant in most capital structures unless the company has contractually payment subordinated debt (like a senior subordinated bond).
Ratio RPs And Ration Investments In Bonds Of Corporate Issuers
Virtually all sponsor deals and many non-sponsor deals now include Ratio RP and Ratio Investment exceptions, permitting the issuer to make RPs and Investments subject only to a total net leverage test, with the test for investments set looser. In February we saw deals of three corporate issuers where the test for such RPs and/or investments was set above opening leverage, meaning it was available immediately with no need to delever.
Evolution of Anti-Net Short Provisions
Since the inception of the inclusion of anti-net short debt activist provisions in both bonds and loans (on the heels of Aurelius’ trial court win on its default claim in one of Windstream’s bonds and Windstream’s subsequent Chapter 11 filing) we have seen an evolution of this provision.
Worst High Yield Bond Of The Month
February’s most aggressive bond was one of the first we saw: Foundation Building Material's Senior Notes. Sometimes a deal includes one or two features that are so aggressive that they overwhelm the rest of the deal.
