The European high yield bond market has emerged as a phoenix from the ashes since the onset of the credit crisis. The availability of bank funding having significantly contracted post-crisis, borrowers are increasingly turning to the high yield bond market to bridge the funding gap. In this developing high yield bond market, bondholders have benefited from enhanced intercreditor protections and this in turn has brought into sharp focus the intercreditor terms which define the relationship between the senior lenders and the bondholders. This alert provides a snapshot of the key intercreditor terms – highlighting those which now appear to be settled and those which remain negotiation hot spots – in a capital structure where senior secured high yield bonds, as the primary debt piece, sit alongside a smaller ‘super senior’ revolving credit facility. This is of course a different dynamic from arrangements where large high yield bond and term bank debt components sit alongside each other in the capital structure and although similar intercreditor issues arise, the specifics of such are outside the scope of this alert.
The most significant development in the European high yield market since the crisis has been the emergence of senior secured bonds. These first appeared in refinancing transactions but more recently have also been used to finance acquisitions.
Before the credit crisis, high yield bonds usually ranked junior to the senior bank debt in the capital structure. The bonds were typically issued by a holding company and so were structurally subordinated to the senior bank debt. The bondholders usually benefited from subsidiary guarantees and share security, but such credit enhancements were, in most instances, provided on a subordinated basis. The bonds were structured so as to be repayable only after the senior bank debt had been discharged and coupon and other payments on the bonds could be blocked if an event of default occurred under the senior bank debt.
In more recent transactions, the picture has changed dramatically. Senior secured bonds are now commonly issued to sit alongside a so-called ‘super senior’ revolving credit facility, which is put in place to meet the borrower’s working capital needs and/or to help the credit or rating of the borrower. The ‘super senior’ revolving credit facility ranks pari passu with the high yield bonds but enjoys ‘super’ priority with respect to the payment of proceeds upon enforcement of the security.
The table that follows sets out certain key intercreditor terms relevant to a capital structure with a ‘super senior’ revolving credit facility and senior secured high yield bonds and seeks to identify those where a market position appears to have coalesced (‘Common Position’) and those which continue to be negotiated (‘Negotiation Hot Spots’). There is currently no LMA standard for these arrangements and it should of course be noted that the positions identified in the table are by no means set in stone. Intercreditor arrangements will continue to be negotiated on a deal-by-deal basis according to the specific circumstances of the relevant transaction. Various factors such as the circumstances under which the bond is issued (i.e., as a new issuance or as a refinancing), the credit rating of the borrower, the extent to which the borrower’s relationship banks prefer to maintain control of certain key decisions and other deal-specific considerations will play a part. The size of the bond debt relative to the bank debt will, however, be a key determining factor.
As more companies turn to the high yield market, and particularly in light of the wall of leveraged loan debt due to mature between now and 2014, it is important that these intercreditor issues are known and understood.
Click here to view the tables.