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
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."
start getting the upper hand in the market, they are
the provisions which we will first see pushback from
the investor community
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
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
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
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
Straw calls for capital markets union
US leverage guidelines’ impact in
Portability: clause without a cause?