To raise new debt at a time of low liquidity, leveraged and other sub investment grade companies must navigate restrictions in loan and bond documents.
Many companies are seeking funding to survive the currently unquantifiable impact of COVID-19. This blog post will consider issues arising in leveraged and other sub-investment grade structures from which all commitments are drawn, or are otherwise not available for drawing, and therefore new funding sources are required. In these structures, contractual restrictions and high leverage can make it harder to accommodate new debt.
Mechanisms to raise debt within existing facility agreements may already exist pursuant to an incremental or accordion facility, which typically ranks pari with existing facilities. This will often be one of the first debt-raising mechanisms to be considered. The availability of these mechanisms can be specifically limited by ratio tests or a hard cap, or, more flexibly, by the general debt covenants themselves without a separate cap. Raising equivalent amounts under a sidecar (separate) facility may also be possible. The key economic terms of such facilities may be subject to limitations if entered into in the six or 12 months post-closing. In more recent facility agreements, there is typically less regulation of sidecar debt than there is in relation to an incremental facility. However, unsurprisingly, these mechanisms are often not available whilst a default is continuing.
If separate debt financing is necessary, companies will need to ensure the structure falls within the debt and security restrictions. Relevant permissions for debt can include:
- Ratio baskets (based on fixed charge coverage or leverage ratios) and associated “freebie” baskets (which may be subject to an EBITDA grower basket)
- Fixed baskets (which may be subject to EBITDA grower baskets)
- Non-guarantor debt baskets (allowing the structurally senior debt referred to above)
- Local financing baskets
- Leasing and sale and leaseback baskets
- Acquisition and development finance baskets
- Some TLB facilities and high-yield bond contain baskets that can be created by converting restricted payment capacity or obtaining credit for equity injections
There may also be flexibility in the carry forward and carry back of baskets, and in the ability to freely reclassify under which basket the debt is incurred (e.g., from a fixed basket to a ratio basket). Depending on the documentation for the loans or bonds, the debt permissions listed above can also be included as permitted security exceptions.
New money lenders are likely to want security over unencumbered assets if security sharing under an incremental facility is not an option. This will depend on the scope of the existing security package. For example, finding free assets in jurisdictions in which all asset security packages are possible can be more difficult. Some places to look for value include:
- Real estate in many continental European countries.
- Shares in smaller divisions or groups of operating companies.
- More complex techniques can sometimes be used to transfer assets to new subsidiaries outside the financed group (“unrestricted subsidiaries”), or in certain cases to subsidiaries that are not part of the guarantor group.
- In recent financings, a typical security package may consist of just shares, intra-group receivables, and bank accounts, which means that there are likely to be unencumbered assets against which debt can be raised without having to share in security or accede to the intercreditor agreement.
Priority debt can be obtained by methods other than obtaining collateral, such as:
- Financing by sale of assets (e.g., receivables securitisation and factoring structures)
- Lending structurally senior debt (rarely prohibited unless it is second lien debt), but sometimes capped either at a fixed amount or percentage of EBITDA
Suffice to say, directors should be cognisant of their duties to their existing stakeholders and, in particular, the shift in some jurisdictions (whether formal or not), when their company is insolvent, to maximise recoveries for existing creditors. Companies must consider some or all of the matters described in this blog post in light of this.