European high yield tussles over change of control

Author: Tom Young | Published: 23 Jul 2014
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Investors in European high yield are once again unhappy at the erosion of safeguards in the region’s booming debt markets.

Six firms met with the Association for Financial Markets in Europe (Afme) last week, hoping to reinforce language in documents governing bond sales.

The objections raise the possibility of another dispute between sponsors and buy-side in high yield, the first since investors wrote a letter to sponsor banks in April 2011, calling for more disclosure on offering documents.

"A number of investors have felt that some of the points agreed during the 2011 discussions were not being followed through completely," said Gary Simmons, director at Afme’s high yield division, who hosted the investors last week.

Decisive action is a possibility. "Investors might decide to write another letter, either to the sponsor market such as in 2011, or just a document of reference for themselves," said Simmons.


  • European investors have complained about the erosion of safeguards in high yield documentation;
  • Key concerns include the dilution of change of control provisions and shortening of non-call periods;
  • A lack of dedicated buy-side forum will make meaningful reform difficult though.

Change of control
As volumes of European high yield pass $110 billion and the balance of power continued to move towards borrowers, investors’ biggest grievances are the dilution of change of control clauses, as well as shortening of non-call periods.

Classic high yield contracts included a put option in favour of the bondholders, who were entitled to their bonds back at 101% of their face value in the event of a change of control. But since 2011, a growing number of deals have included a provision for keeping the bond in place even in the event of a change of control.

Investors are not happy though, with many believing that any new owner should allow for the possibility of a put. Sponsors counter that if the credit position remains unchanged following the change of control, the investment won’t be affected.

One counsel said that the clauses are often redundant following a buyout anyway, with bidders opting put in place their own financing structure.

"So unless the change of control occurs very soon after the issuance, the buyer will want to get rid of the existing bond and finance the deal to their preferences. It hasn’t had a major impact," he added.

Simmons says that, although the clause is rarely enacted, investor opposition is understandable. "From the point of view of investors, when you buy a credit you buy it based on the then current structure and management and you would like to know what you are getting into."

One in-house counsel that IFLR spoke to believes that investor opposition to change of control and non-call erosion was down to little more than the clauses’ relative simplicity.

" There have been many dilutions to protections of bondholders but the change of control provision is the most visible "

"Those clauses are in your face and easy to understand," added one issuer’s counsel. "There have been many dilutions to protections of bondholders but the change of control provision is the most visible. It’s something very easy to pick up on."

According to DebtXplained, 43% of high yield deals in 2014 included this so-called portability clause, up from 14% last year.

Too fragmented?
One issuer’s lawyer argued that despite the news of buy-side opposition to such weakening of covenants, he hadn’t encountered objections on recent deals.

"This anger is the first I have heard about it. You know investors are really furious when they push back on the deal itself. But we haven’t had any opposition when dealing with them on particular credits," he added.

Others have said that despite effective representation by Afme, the European buy-side community does not have a dedicated platform to lobby and is too fragmented to push for reform.

It’s unsurprising then that Simmons believes pushing back on structural developments is important. "You sometimes have to fight against precedent. If things become so prevalent that they become precedent then when the market changes – which it will – you are fighting precedent as well as common sense."

See also

High Yield Report: the ebook

Israel high yield debut unlocks European funding tool

Fitch's Ed Eyerman on high yield versus cov-lite

Credit Suisse's Douglas Buffone on acquisition US financing

How EU private debt growth is changing leveraged lending