LevFin Insight: RBmedia's final docs included crucial revision to payments waterfall provision
8/21/18: Among the slate of revisions to documentation that emerged earlier this month on the $335 million term loan for RBmedia, one change highlighted continuing concerns around loosely constructed language concerning pro rata payments, pro rata sharing and the payments waterfall.
RBMedia is a transaction that saw sufficient demand to price at the tight end of talk, L+450 with a 0% floor at 99. However, as has been the case in a number of recent transactions, investor commitments arrived with requests for changes to documentation. Thus, a deal that’s oversubscribed may nevertheless require extensive revisions.
The change here worth highlighting removes from a required lenders vote threshold to amend the payment waterfall, to a threshold of all affected lenders. The issue has been topical over the last year with the situation that unfolded with NYDJ Apparel.
In May 2017, NYDJ completed two amendments to its 2014-vintage credit agreement with the support of 53% of its lender group (majority lenders) and without the involvement of the remaining 47% of the lender group (minority lenders); the amendments were the basis of a lawsuit against the company and its majority lenders by lenders including Octagon Credit Investors. The suit alleged that certain lenders amassed a “slim majority” in the then-$144 million term loan, and together with the company and the sponsor “wrongfully and malevolently used their majority position to elevate the priority of payment of their holdings to loans held by Octagon and the other lenders who were excluded from the deal.” The lawsuit was ultimately settled out of court via a third amendment to the credit agreement.
Among other things, the May 2017 amendments stripped financial covenants from the loan, but the crux of the Octagon lawsuit was that the transactions primed the minority lenders' debt holdings not only by a new $20 million incremental term loan provided by the majority lenders—which Octagon’s suit alleged was intended to be used to repurchase the debt of the primed lenders at a steep discount—but also by the holdings of the 53% of lenders who approved the amendment, creating a three-tiered waterfall.
In a recent report on the situation, LFI sister publication Covenant Review explained that the May 2017 amendments were predicated around the weak language in the 2014-vintage credit agreement with respect to pro rata payments, pro rata sharing and the payments waterfall. Specifically, there was no requirement beyond a simple majority to amend the payments waterfall, whereas the pro rata payments and pro rata sharing provisions required approval from a majority of lenders of each “adversely affected” class.
The change by RBMedia was by no means uncommon, sources said, though some credit agreements still manage to with the required lenders standard, and some are simply vague on the issue.
Note that the deal included numerous other changes including the removal of a pair of proposed pricing stepdowns at 5x and 4.75x first-lien leverage. Proceeds back KKR’s acquisition of the audiobook publisher from Shamrock Capital. Leveraging the issuer at 5.3x on a net basis.
The six-month sunset on 50 bps of MFN protection was removed, along with carve-outs of the entire ratio based prong and loans with a two-year outside maturity carve-out. However, a carve-out in the F&C of the greater of $30 million or 50% of EBITDA was scaled back to $25 million and 40% of EBITDA. Meanwhile, the ratio incremental prong was scaled back to 5.3x, from 5.5x. An inside maturity basket was removed but the no-worse provision remains.
Asset-sale repayment stepdowns remained but were softened; steps to 50% and 0% at 5x and 4.75 total leverage were moved to 4.25x and 3.75x. As well, the reinvestment period was tightened to 450 days, from 540 days. In a related change, retained asset-sale proceeds will no longer increase the available amount builder basket.
Other provisions that were tightened include moving the unlimited RP trigger to 4.4x total leverage, from 5x, tightening unlimited investments and unlimited subordinated debt repayments to 4.5x, from 5.25x. — Chris Donnelly
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