European high yield’s future battlegrounds

Author: Danielle Myles | Published: 15 Oct 2014
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For European high-yield practitioners, the past 12 months has been their most exciting for negotiating covenants. And it’s laid the groundwork for more issuer-investor tussles in 2015.

When issuer-friendly terms began to gain traction in mid-2012 they were demanded by private equity issuers. Today they are requested by an increasing number of corporates, such that they are now a part of the mainstream European high-yield product.

Investors are pushing back, but issuers are not shying away. According to an audience vote at the Association for Financial Markets in Europe’s (Afme) high-yield conference last week, 44% of attendees expect covenants to become even more aggressive next year.

In addition to portability, call provisions look set to form the centre of many high-yield negotiations.

Shorter non-call periods and the early redemption of 10% of outstanding notes at 103% of par are now standard features of the market. But investors have picked this as one of their battles.

Doug Clarisse, managing director of leveraged and acquisition finance at HSBC, said that pushback on call provisions – as well as portability – started in July.

"They are two of the things that investors understand sponsors are very keen on as it helps them with their exit planning." he said. "But they go against the grain of what the high-yield product has traditionally been, and I think when investors start getting the upper hand in the market, they are the provisions which we will first see pushback from the investor community."

When investors start getting the upper hand in the market, they are the provisions which we will first see pushback from the investor community

Restricted payments

Restricted payment baskets have continued to liberalise over the past year, permitting leverage ratios of up to 6.5 x Ebitda [earnings before interest, tax, depreciation and amortisation] for sponsor issuers and 4.5 x Ebitda for corporates.

Latham & Watkins partner Tracy Edmonson said that unlimited restricted payments based on the leverage ratio is also more common than many expect. She urged attendees to pay close attention to baskets that permit any entity in a group to guarantee parent debt.

"That is essentially a guarantee of third part debt," she said, noting that it has made its way into a few deals.


Grower baskets are tipped to gain in popularity across a range of covenants. These are carve-outs that are capped at the greater of a set value or a multiple of another measurement.

Typically that measurement is total assets, but some are now being tied to Ebitda.

This is one of the issuer-friendly provisions that has not, however, extended to non-sponsors. According to DebtXplained’s senior legal analyst Jane Gray, only one European corporate has benefited from an Ebita-based basket over the past 12 months.

More Afme high-yield conference highlights

Straw calls for capital markets union rethink

US leverage guidelines’ impact in Europe

Portability: clause without a cause?