High Yield Bond Covenants in the U.S. and the Nordics Nordic Capital Markets Forum Seminar 21 October 2013 Robin Nordblad, Dittmar & Indrenius
Introduction Comparison of U.S., Norwegian and Swedish high yield bond covenants Key topics» Call protection / issuer call» Financial covenants» Other key covenants
Introduction Based on review of high yield bonds with a Nordic connection» Sample includes 20 Norwegian, 24 Swedish and 6 U.S. bonds from the last three years» Norway: 18 issuers had listed shares» Sweden: 9 issuers had listed shares» U.S.: none of the issuers in the sample had listed shares» General U.S. market practices have also been taken into account» Governing law used to determine bonds country of origin (i.e., not the issuer s home state)» Only bonds that have high-yield-type covenants have been selected to the sample The study is not representative of the corporate bond market generally
Selected Recent Bond Issuances included in the Sample U.S. Oct. 2013, EWOS (EUR 300m + 1bn NOK) Sept. 2013: Unilabs (EUR 685m) May 2013: Sanitec (EUR 250m) Nov. 2012: ComHem, PIK Notes (EUR 250m) March 2012: Securitas Direct (EUR 770m) Oct. 2011: ComHem (SEK 3,5 miljardia) Sweden Sept. 2013, Cloetta, SEK 1bn Senior Secured Bonds Sept. 2013: Bergteamet, up to SEK 700m Senior Secured Bonds July 2013: År Packaging, up to Senior Secured Bonds June 2013: Index International, up to SEK 275m Senior Unsecured Bonds June 2013: Scandinavian Air Ambulance, up to SEK 250m Senior Unsecured Bonds April 2013: Frankis Group, up to EUR 45m Senior Unsecured Bonds Norway April 2013: Telio Holding, up to NOK 300m Senior Unsecured Bonds June 2013: GasLog Ltd., up to NOK 500m Senior Unsecured Bonds Sept. 2012: TiZir Limited, up to USD 150m Senior Secured Bonds Sept. 2012: Stolt-Nielsen Limited, up to NOK 500m Senior Unsecured Bonds
General Observations U.S. Sweden Norway Fairly consistent covenant structure; developed over several decades Generally only used in the Nordics by large PE sponsors; very large issuances More consistent covenant structure developing? (Fondhandlarföreningen model document) Sample: typically SEK 300-700m (EUR 33m-77m); smallest bond SEK 200m (EUR 22m) Fairly consistent covenant structure, except as regards financial covenants; developed over several years Sample: typically NOK 400-600m (EUR 48 72m); smallest bond NOK 35m (EUR 4.2m) Coupons in sample: 5-10% Coupons in sample: 2.5-12% Coupons in sample: 4-13% Usually unsecured; often with upstream guarantees; recent proliferation in Europe of senior secured bonds Acceleration threshold: typically 25% Sample: ~40% secured Acceleration threshold: typically 50% or simple majority Sample: ~20% secured Acceleration threshold: typically 20%
Call Protection / Issuer Call Bond Term U.S. Sweden Norway Type of loan Bullet Bullet Bullet Maturities Sample: 5-8 yrs Often longer maturities Sample: 2-5 yrs; 3 and 5 yrs most common Sample: 3-7 yrs; 5 yrs most common Issuer call? Makewhole redemption? Redemption premium Other voluntary issuer calls Yes, in whole or in part Non-call period typically up to halfway point of loan period Yes (18/24), in whole only Non-call period typically 1-3 yrs Typically yes Sometimes Typically no First call date premium often ~50% of coupon, subject to annual step-down Sometimes included: (i) equity clawback and (ii) right to redeem 10% of principal amount at 103% Premia vary widely; typically 50-65% in sample Usually subject to annual step-down after first call date Generally no (exceptions: e.g. Etraveli and ÅrPackaging have equity clawbacks) Yes (13/20), typically in whole or in part Non-call period typically 1-3 yrs Premia vary widely; typically 55-75% in sample Usually subject to annual step-down after first call date Typically no
Definition of Incurrence and Maintenance Covenants Maintenance: Issuer must meet certain financial ratio(s) each quarter» For example, fixed charge coverage (interest cover), equity or leverage ratio» Compliance certificate delivered each quarter» Breach right to accelerate the bonds Incurrence: Certain actions e.g. dividend payments or debt incurrence can only take place if a certain financial ratio is met» E.g., fixed charge coverage ratio and/or leverage ratio test
Financial Covenants U.S. Sweden Norway Only incurrence covenants Sample: predominantly maintenance covenants (16/24) Recent proliferation of incurrence covenants (e.g., Orc Group, Kährs, Bergteamet, År Packaging and Cloetta) Several bonds have both incurrence and maintenance covenants (e.g., Frankis Group, Index International, Scandinavian Air Ambulance) Sample: maintenance covenants in almost all bonds (19/20)
Incurrence Covenants U.S. vs. Sweden U.S. Sweden (Orc Group, Kährs, År Packaging, Bergteamet and Cloetta) Applies to: debt incurrence, restricted payments (incl. investments ), merger covenant Applies to: debt incurrence and dividends (or similar payments) Interest cover ratio (in some cases leverage ratio) Based on gross debt and finance charges Both interest cover and leverage ratio Based on net debt and finance charges Pro forma effect given to: incurrence event acquisitions and dispositions up to date of the incurrence repayments and incurrence of ratio debt up to date of the incurrence Pro forma effect given to: incurrence event acquisitions and dispositions up to the date of the incurrence Restricted Payments restricted to ~50% of cumulative net profit up to the date of incurrence ( build-up basket ) Dividends (and similar payments) restricted to ~50% of previous year s net profit New "ratio debt" can only be incurred if the maturity of such debt is longer than the Notes'
Maintenance Covenants Sweden vs. Norway Covenant type Sweden Norway Sample: maintenance covenants in 16 out of 24 Sample: maintenance covenants in 19 out of 20 bonds Interest cover EBITDA/profit : finance charges, or equivalent 9/16 6/19 Leverage ratio (net) debt : EBITDA 6/16 5/19 (also total debt : Minimum book equity or book equity to total assets, or equivalent Minimum liquidity equity) 7/16 13/19 (sometimes market 5/16 (5 12% of principal amount of bond /cover for 12 months interests payments) 1/16 (LTV for real estate company) adjusted) Asset cover /asset-value based 4/19 covenants Minimum working capital None 1/19 Current ratio None 1/19 Note: Several bonds included several financial covenants. They have all been included above except where a bond included two variations of the same covenant (e.g., two types of leverage covenants). 11/19 (5-25% of principal amount of bond)
Dividend Payments & Debt Incurrence Term* U.S. Sweden Norway Dividend payments Incurrence based 50% of cumulative net profit Sample: 17/24 (9/17 issuers had listed shares) Typically incurrence based and/or limited to ~50% of previous year's profit Only 2 outright prohibitions Sample: 10/20 included restrictions (8/10 issuers had listed shares) Typically up to ~50% of previous year's profit Only 3 incurrence based Only 2 outright prohibitions Debt incurrence Incurrence based Covers all types of debt Sample 19/24 Often incurrence based Generally covered all types of debt (in a few cases only debt securities) Sample: 9/20 Not incurrence based Generally covered all types of debt * Note: this included explicit restrictions only and not indirect restrictions such as maintenance covenants.
Negative Pledge & Disposals Term U.S. Sweden Norway Negative pledge (NP) Yes Covers all types of debt and entire bond group Disposals Applies to all asset disposals >~75% of consideration must be in cash Proceeds must be used to pay down debt Sample: 20/24 15/20 covered all types of debt, with 5 covering only security on debt securities Typically covered also (material) subs Sample: 20/24 Typically applies to a sale of "all or a substantial part of the assets" (sometimes explicitly including material subs) Must be at FMV Only prohibited if triggers MAE Sample: 7/20 7/20 generally covered all types of debt "financial support" restrictions in some bonds that do not include NP Sample: 20/20 As for Sweden
Mergers/Demergers & Acquisitions Term U.S. Sweden Norway Mergers and demergers Different covenants apply depending on structure: Involving issuer merger covenant Asset disposal covenant If an "Investment" restricted payment covenant applies Sample: 23/24 Typically applies to a merger/demerger of issuer or its (material) sub into an entity outside the issuer group Requires agent's consent Often subject to absence of MAE requirement Sometimes completely prohibited if involves issuer Sample: 20/20 Applies to (i) mergers involving a consolidation of the assets and obligations of the Issuer or any group company with any other entity and (ii) demergers involving a split of the issuer or a group company into 2 or more separate entities Prohibited if results in an MAE Sometimes applies to issuer and its material subs only Acquisitions Regarded as "investments" if involves shares of securities (acquisitions of majority stakes typically excepted) Generally not directly restricted Generally not directly restricted
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