LevFin Insight: Investors pore over Refinitiv's docs ahead of tomorrow's deadline as TL order book swells to nearly $10B

9/13/18: As momentum builds for Refinitiv’s cross-border LBO loan transaction, investors are nevertheless waiting to see how much leverage they will have to extract changes to documentation in the face of a mounting book of commitments that is approaching $10 billion against a $5.5 billion U.S. dollar term loan.

The deal launched to market with some commitments in hand courtesy of an early marketing round, though the book has been steadily building since the lender meeting last week. Pricing is on track to hit at least the tight end of guidance with respect to both the spread and OID—L+400 at 99.5—and the accompanying secured dollar bond deal is also moving tight to earlier whispers amid a heavy oversubscription. The cross-border, dual-asset-class nature of the financing also provides the arrangers with flexibility to revise the structure to optimize the execution for the borrower.

After a full term sheet was posted to investors on Tuesday, investors have been delving into the documentation. A paramount concern for analysts at LFI sister publication Covenant Review with respect to the bond covenants is that the restricted payments language excludes the typical requirement that the company be able to incur $1 of ratio debt to access capacity under the RP build-up basket, “which could facilitate distributions of assets to the sponsors or other sponsor shenanigans at a time that the Company has become distressed.”

Due to the private nature of the loan asset class, LFI cannot access CR’s analysis of the loans; however, a copy of the term sheet reviewed by LFI says the loan also will not have any performance tests for accessing the RP builder basket, which includes a $1 billion starter basket with a 0.4x EBITDA grower.

Among other things, the term sheet outlines an unusual portability provision that appears to have crept into the document due to the cross-border nature of the loan-and-bond execution. The issuer is seeking to place first-lien debt in both the loan and high-yield markets, a rare move that is presumably designed to maximize investor capacity for the $13.5 billion debt package. LFI has tracked only tracked only four other issuers over the past two years to concurrently issue pari passu first-lien loans and bonds for an M&A or LBO transaction over the past two years.

As proposed, the document would allow for a change of control if pro forma total leverage is 4x or lower, which, according to analysts at CR, is in line with the bond covenants. A leverage-based portability feature such as this is common in the European high-yield market, but very rare for U.S. institutional loans, according to CR analysts.

CR analysts characterized the change-of-control language in the U.S. bond document as an “extremely aggressive and off-market version of leverage-based portability, even compared to European high yield deals that include portability.” Among CR’s criticism of the CoC language in the bonds is that it can be used multiple times and that the company can actually incur leverage above 4x because the document includes a “certain compliance calculations” provision that permits the issuer to exclude any debt incurred under non-ratio-based baskets.

To be sure, investors will be scrutinizing other elements of the document ahead of Friday’s expedited deadline.

Among the items that accounts could push for are tighter terms around the definition of EBITDA, given the heavily adjusted EBITDA line. The issuer is marketing approximately $2.5 billion of adjusted EBITDA, which among other items, encompasses roughly $650 million of cost savings, of which $315 million are expected during the first year. The issuer is proposing a 36-month look forward period with respect to add-backs related to the LBO and 24 months with respect to future transactions, with no cap on adjustments.

As is typical, the terms of the incremental facilities are predicated off the adjusted EBITDA line: the loan would include a $2.435 billion free-and-clear incremental facility with a 1x grower; additional amounts would be available up to 4.55x net first-lien, 5.5x net secured, and 5.5x net total leverage/2x interest coverage—note the first-lien and secured/total leverage prongs are wider than marketed net pro forma leverage of 4.2x/5.2x.

As presented, the issuer is seeking a six-month sunset on 75 bps of MFN protection that applies only to the ratio basket and includes numerous carve-outs, including a $1.83 billion fixed-dollar carve-out, loans for acquisitions, those with a one-year outside maturity, and TLAs. The transaction also includes a $2.435 billion inside-maturity basket with a 1x grower.

The prevalence of asset-sale step-downs has also been concerning to some investors, given the potential for the issuer to sell off business units in the future. The issuer is proposing a step-down to 50% at 4.05x net first-lien leverage and 0% at 3.55x net first-lien leverage, with an 18-month reinvestment period. — Kerry Kantin/Chris Donnelly

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