In April alone more than 20 US HY deals have launched compared to 0 in Europe (excl. Ardagh's $ deal). For that reason we've been watching the US High Yield market closely for leading indicators of when the European market will reopen and what to expect when it does.
Today we've been exploring some novel bond terms which were first flagged by the LCD News team in the US - at 9fin we're calling it the 'Corona-claw'. This is a new optional redemption clause which appears in Cliff's Senior Secured Notes deal. In essence it is a cross between an equity claw and the 10% @ 103% claw that is now commonplace in high yield deals.
The special redemption provision permits 35% of Notes to be bought back at 103% with proceeds from any "Regulatory Debt Facility" within 120 days of the Issue Date. This is in addition to a classic 35% @ par + coupon equity claw.
A "Regulatory Debt Facility" is defined to include any debt facility the Company or its subsidiaries enter into in connection with the United States CARES Act (Coronavirus Aid, Relief and Economic Security Act) or any other legislation implemented in response to COVID-19. Any "Regulatory Debt Facility" also has a Permitted Lien carve out so it can be secured.
We note that the Company has not yet received any loans under CAREs, but it did disclose that it may
"submit an application for a loan under the CARES Act to secure additional financing".
Under the CARES Act, there are conditions on dividends, employee retention and wage levels for any borrower. However we've not read about any restriction on debt buybacks from proceeds - this could be deliberate or an oversight. The presence of the clause in itself suggests underwriters & company counsel think it is a legal possibility.
The OM also states explicitly that
"from time to time, [Cliff's] may repurchase certain of our existing unsecured notes or exchange new secured notes for certain of our existing unsecured notes in privately negotiated transactions as part of a liability management strategy."
Given this 'liability management strategy', it seems likely the claw would only ever be exercised a) to save interest on the Notes and b) when the Notes are above 103% (otherwise you could buyback at a lower price in secondary).
Therefore the question for HY investors in this deal is whether you are happy to get 3% for 4 month's risk on 35% of your deployed capital? Not likely if you can sell your Notes above that level in secondary...
European issuers accessing the market may want to consider including similar 'Corona-claw' provisions, albeit the level of government backed loans available to European companies is much more limited than under CARES in the US.
For example the UK's CBILs scheme has a loan size cap of £25m or £5m for SMEs - that doesn't move the needle for any HY issuer. Access to the BoE's commercial paper program meanwhile requires an IG rating.
We remain on the lookout for any COVID-19 covenant developments - when they emerge we'll circulate a comment. As ever, the 9fin team are also available to discuss any market developments or how our data can help you in these volatile conditions.