High yield bond offerings have been a core component of the European leveraged finance segment since 2009. The value of European high yield bond issuances has increased dramatically, more than doubling from 2011 to 2014 according to S&P. In the first half of 2014, high yield bonds accounted for well over half of all European leveraged finance by volume, although this boom tailed off in the second half of the year. In a quickly maturing market, we are beginning to see some novel high yield techniques such as specified asset sale carve-outs.
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PE transactions are becoming increasingly complex and sponsors often require additional flexibility in many of their acquisitions. For instance, PE houses may have definite plans to dispose of certain assets within an acquired business, or may need to in order to satisfy competition and regulatory authorities. In these instances it is vital to have the flexibility to restructure an acquisition – including the possible sale of designated assets – so having a high yield bond structure that facilitates this option is an important component to the overall transaction.
In such circumstances, a PE house might seek additional flexibility under the asset sale covenant of any high yield bond used to finance the acquisition of the business. For example, an asset sale carve-out might provide further flexibility in structuring a specified future sale of one or more of the assets acquired, or relax the requirement to reinvest any net cash proceeds from any such sale.
As ever, the US market tends to pioneer many of these new structures, though Europe continues to play an integral role in their evolution. By way of example, the US retailer, J.Crew, issued 8 1/8% Senior Notes due 2019 that contained a carve-out from the asset sale covenant for a sale of its Madewell business. We have seen this feature imported into certain European leverage buyout financings (or refinancings), where the PE house has in mind a specific disposal. For example, the S&B Minerals’ 9.25% Senior Secured Notes due 2020 had a carve-out for a sale of the bauxite business (requiring only that fair market value be realized for the sale).
While these carve-outs are only likely to be included in a small minority of high yield issuances in Europe, the concept provides important flexibility to PE sponsors that are executing complex acquisitions, particularly if the sponsors are considering specific divestments. We see carve-outs as another mechanism for making high yield bond issuances more attractive to PE houses, and in turn contributing to the increased volume of high yield bond issuances.