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Capital Markets

All Issuers Getting Friendly Terms

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September 13, 2017

Great terms like higher cov thresholds and tighter spreads in offing.

Financial RiskThe trend of increasingly friendly terms for all types of corporate issuers is continuing, according to a new report by Fitch Ratings, and includes advantageous features like higher covenant thresholds and compressing spreads.

The trend is by no means new, as the low interest-rate environment over the last several years has prompted investors to pour capital into riskier investments. Nevertheless, indications point to it continuing for the foreseeable future, and for investment-grade and noninvestment grade corporates alike that means ever-tighter spreads.

On the noninvestment grade side, investors’ ongoing search for yield has also resulted in more flexible terms, and Fitch’s research suggests that trend is going strong. In its “Fitch 50: Structure and Covenant Analysis for 50 Prominent US Leveraged issuers,” published Sept. 7, the rating agency analyzes 50 “prominent” US leveraged corporate issuers, summarizing their credit agreements and bond indentures, and illustrating their capital structures. The report examines 26 new companies, focusing on those whose loans are widely held or represent their respective industries. They include Envision Healthcare, Revlon Consumer Products, Party City Holdco, Frontier Communications and Eldorado Resorts.

“Fitch observed a marked trend toward amending existing terms or incorporating new language in ways that are advantageous to issuers,” Fitch says, adding, “In addition to increasing covenant thresholds and compressing spreads, terms allowing additional flexibility under debt incurrence, restricted payments and investment baskets are especially prominent.”

Fitch notes that the report analyzes companies with ratings ranging widely, between CCC and BB+, with issuers rated B+ and B as the two most represented groups. The median leverage multiple across the 50 issuers was 5.1 times, ranging from 2.0 times for United Continental holdings to 17.7 times for Weatherford International plc.

“The issuers with the highest leverage multiples were in the consumer/retail, oil and gas, and telecom, media and technology sectors, as expected,” Fitch says.

The analysis follows a May Fitch report that described weakening credit terms—troubling to investors but a boon for corporate issuers. iTreasurer noted several terms changing to the benefit of corporate borrowers, including favor nation sunsets, collateral leakage and the elimination of prepayment restrictions on senior unsecured and junior-lien debt (See “Cov-lites Light Up Loan Market,” June 13, 2017).

Other increasingly borrower-friendly terms noted by the report include EBITDA adjustments, which Fitch says can impact “countless aspects of the documentation, from how leverage ratios are calculated through setting covenant levels, to sizes of various baskets derived as EBITDA multiples.” It notes further that “issuer-defined” EBITDA can impact financial covenant ratios and incurrence tests, and it can enable issuers to increase leverage capacity.

Fitch also notes that terms are deviating from requiring all or most proceeds from asset sales to go to debt prepayment by instead applying a leverage ratio grid, “where if the leverage ratio is below a certain threshold, none of the proceeds from an asset sale would be required to be applied toward the company’s debt,” citing GoDaddy, Ferro and Novolex as examples.

In addition, issuers have been able to weaken call protections that make refinancing debt opportunistically to take advantage of compressed spreads more expensive. Fitch notes recent deals have scaled such protection down to 12 months and in some cases six months, with Change Healthcare and Dell Technologies as prime examples.

“Call protection has also been loosened for prepayment upon specific events,” the report says, “Notably, Cyxtera shifted call protection for its second-lien notes from the usual 102 in year one to 101 in the event of a change to the tax code in its March 2017 credit agreement.”

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