High yield benchmark for French corporates

Author: Danielle Myles | Published: 2 Feb 2011
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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 issuer.

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 investors.

"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 McKimm.

Covenant package

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.

Security

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 banks.

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 issue.

This was overcome through the intercreditor arrangements.

Intercreditor terms

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.

Country law

The transaction was a New York-law governed 144a/Reg S offering.

Tear Sheet

January 2011

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