The High Yield bond market has started 2017 with a bang seeing volumes of €23.8 billion from 60 transactions in Q12017, representing the third best start to the year since 2006. While much of the issuance has been in BB territory, paper is being written at tight spreads across the credit spectrum with Play’s €500 million PIK Toggle (B-/Caa1) priced at 5.375% fixed being an excellent example. Veralia returned to the market to relaunch a PIK Toggle (pulled last October) providing further evidence of strong primary demand.
This programme is designed to provide participants with an in-depth guide to negotiating an appropriate covenant package for New York-style high yield bonds. It will also benefit players in the syndicated loan / TLB market whose terms increasingly mimic those found high yield bonds (e.g. grower/builder baskets and other HYB-style features imported to the loan market).
The high yield incurrence based approach to covenants affords issuers with a much higher degree of financial and operational flexibility than traditional loans whilst simultaneously seeking to provide investors with an appropriate level of protection through the credit and business cycle. The complexity of the high yield covenant flows from the fact that many terms in the documents apply in different areas and are often inter-dependent. For example, distributions to investors also depends on the restricted groups’ ability to incur debt whilst (grower) baskets which cascade through the indenture are governed by EBITDA, which itself is the subject of increasingly issuer-friendly add-backs (e.g. sponsor payments to use a trite example)
Whilst the high yield bond indenture follow the same format, the devil is hidden in the detail which can be discovered only through an in-depth analysis of the Indenture. For example, some recent issues have applied adjustments to financial ratios in differing ways within the same Indenture, enabling management to game the covenants to their advantage. In other cases, leverage ratios have excluded different types of debt to enable issuers to maximise leverage and effectively undermine noteholders’ collateral. Perhaps more significantly for investors, redemption rights and equity claw-backs have come under increasing pressure increasing reinvestment risk and potential value erosion. Other aspects of the covenant package which have been under attack relate to restricted payments (i.e. distributions) via the use of free and clear baskets and the ability to reclassify from relevant baskets.
During the programme, the covenant package will be discussed with reference to extracts from recent Indentures. Current market trends will be illustrated with selected data from DebtXplained (the key provider of information to the European high yield community) providing guidance on what is, and is not, market standard.
Against this background the course now includes a number of new sections; first, specific aspects that relate to PIK notes using analysis from DebtXplained; second, some of the intercreditor issues that flow from the super-senior RCF structures which dominate market issuance; third, to provide participants with greater visibility into the market, an overview of the issuance process and finally, how issuers approach the issue of pricing.
For Issuers, the programme identifies the key structuring & documentary issues to ensure that they are able to achieve maximum operational flexibility post issuance. It also provides some guidance on what is required to be able to access the capital markets.
Participants will be required to (1) analyse the pros and cons of various structures currently used in the market (2) identify some of the key areas of value leakage and (3) discuss the role and impact of subordination.
Case: Covenant analysis of Algeco’s 2018 Senior Secured Notes in light of the proposed Modular Space Corporation “merger”
Within Redcliffe Training we offer a number of finance courses which are essential to understanding your particular market, as such we offer varied course on HYB, and Mezzanine
PIK Training Course
Training Course Area
|Negotiating Heads of Terms||PIK, Bonds, mergers and acquisitions,|
|Asset Based Lending||Gain an appreciation of asset based lending (“ABL”) in tandem with other funding sources|
|Negotiating Mezzanine, PIK, Second Lien And Unitranche||Mezzanine finance, PIK, debt finance, junior debt, senior debt|
|Alternative Lending||Unitranche Debt, mezzanine finance, PIK,|
|Infrastructure Project Finance Course||Debt finance, debt techniques, subordinated debt|