High Yield Bonds – Market Update

This course can also be presented via live webinar.

HYB – Market Update Course Content:

  • Overview: key trends in the last 6 months
  • Leverage Risk
    • Flexible ratio ralculations
    • Complex definitions
    • Aggressive add-backs
    • Impact on lenders/ investors
    • Advantages to issuers
    • Different applications for inclusion of pro forma cost savings & synergies across ratios
    • Expansion of flexibility typically allowed for “limited condition acquisitions”
    • Certain types of debt excluded from “leverage” or “secured” leverage ratio
    • Narrower numerators in senior secured leverage ratios
    • Increasing basket flexibility
  • What about EBITDA
    • Review of other EBITDA add-backs
    • Uncapped EBITDA add-backs and pro forma adjustments: cost savings and synergies
  • Value Loss
    • Loosening on Dividends
      • Ratio capped restricted payments basket
      • Upfront “Free and Clear” Credit in the CNI Build-Up Basket
    • Asset sales that allow immediate payment of dividends
    • Affiliate transactions – dilution of controls
  • Dilution and subordination
    • Increase in the number of naskets capable of being secured on collateral
    • Reclassification of permitted liens and permitted collateral liens
  • Redemption
    • Ratings or ratio based “portability” change of control exemptions
    • Dilution of equity clawbacks
    • Special optional redemption during the non-call period
    • The “J Crew Trapdoor”

HYB – Market Update Course Summary:

With over €114 billion of HYB issuance in 2017, issuers took full advantage of the balmy, borrower friendly conditions to further erode covenant protection. Investors are increasingly concerned over these developments but may often be unaware of the myriad of subtle ways in which lawyers can corrode the covenant protection. This is magnified by the lengthy and complex nature of bond documentation and the short turn-around times which leave investors with scant time to get to grips with the minutiae of the various carve-outs. The “J Crew trapdoor” is an excellent example where the sponsor used a loophole in the Indenture to transfer IP outside the Restricted Group.

This update reviews the current key trends and developments in the high yield bond market using current market data from Debt Explained.

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21 September 2018