Worldwide:
Navigating Disruption In The Bond Market
31 March 2022
Willkie Farr & Gallagher
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As global economies emerge from the COVID-19 pandemic, bond
issuers continue to face headwinds, not least arising from
Russia's recent invasion of Ukraine. Given the absence of
maintenance financial covenants (other than perhaps a springing
leverage covenant – see below), bond issuers with upcoming
maturities and/or liquidity constraints are a focus, with some
downward pressure on secondary pricing. This primer summarises
certain recurring issues for consideration.
Capital Structure & Priority
(1) What is the capital structure, ranking and collateral
package of the different instruments?
(2) Is collateral common across all debt instruments?
(3) If a super senior revolving facility
(ssRCF) is present, is it super senior
only to the proceeds of enforcement of shared security?
(4) If the ssRCF contains a single leverage covenant, is it
springing, and can it be relied upon beyond ssRCF lenders?
|
Restricted vs Unrestricted Group
What is the breakdown between the EBITDA and assets of the
restricted group vs. the unrestricted subsidiaries
(URS)?
Compare this:
- against the level at issuance;
- over time to analyse whether it has used up restricted payment
(RP) capacity; and
- against remaining RP capacity.
|
Credit Support. What is the guarantee and security package and
is it worth anything?
- Single Point of Enforcement? Should sit through structural
share security in a creditor-friendly jurisdiction, with most of
the restricted group being guarantors of the bonds, but this should
be carefully analysed.
- How significant are the unencumbered assets within and outside
the Restricted Group? Link this to the priming lien risk (see
below), to assess if it arises in bankruptcy scenarios or whether
it is more broad.
- Different jurisdictions may limit the enforceability of
guarantees. Note also the more limited set of debt incurrence and
lien permissions applying to non-guarantor restricted subsidiaries
(NGRS) to incur structurally senior indebtedness.
- Intercreditor Restrictions. Check constraints on enforcing the
key structural security including contractual restrictions under
intercreditor arrangements, including value protection requirements
and release provisions.
|
Priming / Dilution
Capacity
- What is the aggregate capacity under ratio-based and other debt
incurrence permissions?
- What is the most recent financial information on which to make
the assessment?
Priming
- Can new debt rank in priority to the existing bonds, either
through being borrowed by an URS or NGRS, on an earlier maturity
basis or through use of a specific debt / lien basket?
Other sources of liquidity
- Can baskets be created or inflated in combination with an
equity injection (Contribution
Indebtedness capacity)?
- Are sale and leaseback or receivables factoring baskets
available as a source of liquidity?
- Are there ways in which liquidity can be raised by disposing of
URS or borrowing against assets in URS?
|
Value Leakage
- What is the aggregate capacity under ratio-based and other RP
permissions, including by way of investment outside of the
restricted group and permitted payments to owners / other third
parties?
- Where a Contribution Indebtedness basket is present, can the
proceeds be paid back out as a permitted payment?
- Can the proceeds of asset sales be used to make permitted
payments/investments and circumvent the asset sales
waterfall?
- Can RP capacity, which may have built up under the Available
Amount (or similar concepts), be used to increase borrowing
capacity?
- How much of the business is held in URS and what is the ability
to dispose of or otherwise deal with those URS and transfer further
value into them (i.e. J-Crew)? Are J-Crew blockers etc. in
place?
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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