French diagnostics company Labco opened the year’s
European high-yield market with its €500 million debut
bond. Compared to the private equity-driven offerings that
dominate the French market, the issuer’s
complicated ownership structure introduced extra considerations
under the country’s regulations.
For the country’s high-yield lawyers,
a corporate choosing to refinance this way is relatively
uncommon. "It was interesting to see a widely-held French
corporate seeing the benefit of issuing high yield," said Ward
McKimm from Shearman & Sterling who acted for the
Its collection of subsidiaries presented issues
under French regulations. Despite appearing on its consolidated
balance sheet, Labco lacked majority voting power in many of
the group’s entities. Extra steps were needed to
bind these subsidiaries to the terms of the indenture.
"We needed to make sure that each subsidiary where
Labco had this minority voting position would sign a covenant
agreement, and that took some explaining," said Ward McKimm
from Shearman & Sterling who acted for the issuer.
This added to the explanations needed for the many
individual shareholders unfamiliar with high yield.
The issuer’s growth strategy is to
acquire independent laboratories, with their owners becoming
shareholders of Labco while continuing to manage their
business. These account for more than half of
Labco’s capital (according to its website)
creating a relatively unusual situation where the decision to
launch a French high-yield issue spanned beyond sophisticated
"I hope it’s the beginning of a trend
where the appetite for high yield instruments in France is
shared by corporate issuers as well as more sophisticated
consumers of debt products such as private-equity houses," said
The issuer needed the flexibility to continue to
grow through laboratory acquisitions but also minority
investments in other jurisdictions; plans for the latter
required restricted payment carveouts.
The package is relatively light, consisting of
first-ranking liens over the majority of the
group’s shares and certain inter-company loans. No
tangible assets were secured.
"In order to give the bondholders security interest
or guarantees you had to go through a fair amount of corporate
hoops," said Olivier Saba from Bredin Prat who acted for the
This is due to its structure as essentially a large
group of entities operating laboratories and the fact Labco had
concurrently entered into a senior €125 million revolving
credit facility (RCF).
Frances’s strong corporate benefit
rules state that a subsidiary must receive something in return
for granting a guarantee or security. This meant the guarantees
and security able to be offered by Labco’s
subsidiaries was dictated by the distribution of
Labco’s proceeds from the RCF and its bond
This was overcome through the intercreditor
The RCF and bonds were intended to be secured on
the same assets. "[So] the security package and intercreditor
principles were constructed to provide a consistent package to
both the RCF and bond investors," said McKimm.
Notwithstanding the corporate benefit rules, the
intercreditor obliges each party to share it’s
security subject to the agreed waterfall.
The transaction was a New York-law governed
144a/Reg S offering.
Labco completed its debut bond offering: €500
million senior secured 8.5% high-yield notes due 2018. The
notes have a three-year non-call period and, together with a
€125 million super senior revolving credit facility, the
funds will be used primarily for refinancing. The bookrunners
were Credit Suisse, Deutsche Bank, Natixis and UBS.
Counsel to issuer:
Shearman & Sterling
International counsel to
underwriters: Cravath Swaine & Moore
French counsel to
bookrunners: Bredin Prat