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Market overview

High-yield debt securities versus bank loans

Discuss the major differences between high-yield debt securities and bank loans in your jurisdiction. What are some of the critical advantages and disadvantages?

High-yield debt securities, unlike bank loans, are regulated by securities laws. In fact, an offering may be regulated by several different regimes if sold into multiple countries.

Typically, a tranche of high-yield securities issued by an English issuer will be sold, or at least be eligible to be sold, into the United States under an exemption from registration made available under Rule 144A under the US Securities Act of 1933. The US securities laws will therefore be relevant both as to whether the securities qualify for an exemption from registration and as to the disclosure standards applicable to the offering documents (see questions 2 and 15 on Rule 10b-5 under the Securities Exchange Act of 1934).

A tranche will also typically be sold to investors in the United Kingdom and the rest of Europe, so that UK and local requirements will apply to govern to whom the securities may be offered in each jurisdiction.

Finally, high-yield securities issued by English issuers are typically listed on a stock exchange, often in Luxembourg or Dublin, but also in various other jurisdictions. Therefore, the offering documentation must comply with stock exchange requirements and, depending on the type of stock exchange, potentially also national laws regulating the offering of stock exchange-listed securities.

Regulation

Are you seeing increased regulation regarding either high-yield debt securities or bank loans in your jurisdiction?

Yes, to a limited extent in relation to high-yield securities. High-yield securities in general are governed by New York law and subject to Rule 10b-5 when sold into the United States. As a result, changes in the US laws made from time to time as to disclosure requirements tend to flow through into the London high-yield market as well. In addition, European regulations as to listed securities have seen constant updating and reform, meaning that issuers of high-yield securities have become subject to higher disclosure standards, particularly in relation to ongoing reporting.

Indirectly, high-yield securities have also been affected by increased regulation of the investment banks that underwrite or arrange their sale. Investment banks are constrained in the leverage levels that they may offer to underwrite for issuers and also in their ability to trade in securities for their own account.

Current market activity

Describe the current market activity and trends in your jurisdiction relating to high-yield debt securities financings.

European high-yield volumes declined by 10 per cent in 2016 to approximately US$113 billion from approximately US$126 billion in 2015 according to Thomson Reuters. After a weak 2016, the European high-yield market returned strongly in 2017, with issuers achieving low interest rates and also generally securing favourable documentary terms. This trend continued at the start of 2018, with issuers achieving favourable pricing and ever-improving terms.

The traditional role of high-yield securities in the London market was in providing a junior layer of capital behind bank debt, often to provide a higher leverage level than available from bank-only financing. This role changed substantially over time. Particularly in the period after the Lehman collapse, when the loan market was much more constrained and bank balance sheets were impaired, high-yield investors filled the gap by financing senior secured notes that took the place of bank debt. These notes were often paired with a super senior revolving credit facility to provide liquidity to the issuer.

The London market has now seen a resurgence of the loan market, so that the senior secured note product has been replaced in many cases by a loan facility, and high-yield securities have often taken up their traditional position again in providing a junior layer of debt that adds more leverage.

The London and European markets as a whole have also seen the development of crossover or ‘high-yield lite’ packages, which are similar to investment grade covenant packages, even though issued by subinvestment grade issuers. This may continue if a sizeable number of large public companies are rated sub-investment grade.

Main participants

Identify the main participants in a high-yield debt financing in your jurisdiction and outline their roles and fees.

The participants in a high-yield debt financing in the United Kingdom are essentially the same as those in a US transaction. The key participants are the banks that play the role of the underwriters or initial purchasers. The underwriters have three main responsibilities:

  • they create the process for the issuer. They create the timeline, prepare the issuer for meetings with investors, create roadshow schedules, bring the issuer on the roadshow to meet with investors and so on;
  • they are responsible for marketing the offering for the issuer. For example, the offering document for a high-yield debt security will typically have a short section upfront commonly referred to as the ‘box’, and it will contain, among other things, strengths and strategies of the company, which is the marketing element of the disclosure document. The underwriters play a significant part in crafting the marketing story for the issuer; and
  • they act as the gatekeepers for the market in terms of the covenant package being negotiated. As opposed to bank loans, the underwriters typically do not hold the high-yield debt securities on their books, but they are looked on as the experts in terms of what the market will and will not bear as it relates to covenant packages. For their services, the underwriters will receive a gross spread tied to a percentage of the issue price.

There are other participants in a high-yield debt financing. Lawyers and accountants play a crucial role representing the issuer on the one hand and the banks on the other. Rating agencies are always involved because they have to provide a rating on the proposed high-yield debt security that is critical for the execution of the deal. And finally, there is the trustee. High-yield debt securities are very widely held. As a result, it would be impractical to have each investor sign the indenture, which is the document that contains the covenant package for the securities. Instead, the trustee signs the indenture on behalf of all of the note holders and acts as middleman between the issuer and the investors, which helps control the flow of information among the parties. The trustee comes equipped with its counsel on any transaction and receives fairly standard flat fees in connection with each engagement.

If a stock exchange listing is desired, thought must also be given to the selection of an appropriate stock exchange for the listing, together with counsel and a listing agent.

New trends

Describe any new trends as they relate to the covenant package, structure, regulatory review or other aspects of high-yield debt securities.

The trends in high-yield are always changing based on the state of the market. For example, when the market is hot and there is much demand for high-yield paper, issuers and sponsors start to forge ahead. As a result, there tends to be more flexibility in the covenants, primarily in terms of issuing debt and making restricted payments. As the market cools off and investors become more selective in terms of the paper they are willing to buy, covenant packages start to tighten up.

The real trend is increased regulatory review and its effect on the high-yield market as a whole. Every statistic shows that the number of leverage buyouts over the past year or so has declined, and the size of those buyouts has declined as well. One reason for this is increased regulatory scrutiny of the banks and limits to how much debt they can lend to companies for these types of acquisitions.

Documentation terms

Issuance

How are high-yield debt securities issued in your jurisdiction? Are there particular precedents or models that companies and investors tend to review prior to issuing the securities?

Every high-yield debt security is issued pursuant to an offering memorandum or prospectus provided to prospective investors. The offering memorandum describes the business of the company, describes the transaction being undertaken and contains the covenant package being offered to investors.

There are always precedents and models that need to be reviewed prior to issuing the securities. In a sponsor leveraged-buyout scenario, the issuer will usually look to the last deal completed by that sponsor. Every sponsor has a form for its covenants and while every covenant package will be tailored to the particular needs of each issuer and its industry, the sponsor form is the starting point for such deals.

Every sponsor and bank has a form. If the issuer has issued high-yield debt securities in the past, then the prior covenant package is the appropriate starting point for the new issuance. However, for debut high-yield issuers, typically, the deal team will look at a combination of the lead bank’s form, recent sponsor precedent (if relevant), recent precedents in the issuer’s particular industry and perhaps recent precedents for issuers with a similar credit profile.

Maturity and call structure

What is the typical maturity and call structure of a high-yield debt security? Are high-yield securities frequently issued with original issue discount? Describe any yield protection provisions typically included in the high-yield debt securities documentation.

High-yield debt securities issued in the London market tend to have either an eight-year or a seven-year maturity, although there are securities issued with different maturities, including substantial numbers with a five-year term. In general, high-yield debt securities are not redeemable at the option of the issuer for a specified number of years, permitting investors to lock in an interest rate for a significant period. For example, after a three-year non-call period, seven-year securities are typically redeemable at a redemption price equal to par plus half the coupon, and the premium then declines rateably to par two years before maturity. These terms change depending on the strength of the market and the strength of the issuer, with the premium payable or the non-call period changing.

Make-whole redemption allows issuers to call the securities during the non-call period at a price equal to the present value of the optional redemption price on the first optional redemption date and future interest payments up to that date. The present value is almost always calculated based on the Treasury (or Bund or Gilt, as applicable) rate plus 50 basis points, which approximates the price that investors would expect to receive in a tender offer.

Another significant exception to the non-call period is the ability of an issuer to redeem a portion of the securities with the proceeds of an equity offering during the three years following the issuance date (commonly referred to as the ‘equity clawback’ or ‘equity claw’). This exception, which is nearly universal in high-yield offerings, permits the issuer to deleverage after an initial public offering or after raising additional equity capital. Typically, issuers may not redeem more than 35 per cent of the original principal amount of the securities in an equity claw, although 40 per cent is possible in some deals. The issuer must pay a redemption price to investors equal to par plus a premium equal to the full coupon, plus accrued interest.

A less common exception to the non-call period is the ability of the issuer to redeem a small portion (typically 10 per cent) of the securities during the three years after the issue date, at a specified premium to par (typically 103 per cent). This provision is much less common than the ‘equity claw’ provision described above. One argument for this provision is that secured notes became prevalent in the marketplace during the global financial crisis in 2008 and often substituted for secured term loans. While term loans are generally prepayable at par, many terms loans include a soft call at 101 per cent feature for a short period after the closing date if prepaid with the proceeds of another financing, so some issuers sought to mimic this type of redemption feature for secured notes. As a result, in capital structures where secured notes exist alongside secured credit facilities, it is sometimes possible to redeem up to 10 per cent of the notes in any 12-month period during the first three years after issuance, at a price equal to 103 per cent plus accrued interest. Occasionally such 10 per cent exception is found in unsecured notes too, particularly floating rate notes.

Some high-yield securities are issued with a floating rate of interest, and these securities tend to have terms more favourable to the issuer for redemption; they may be non-call for only a year or two, and have a low premium on being eligible for redemption, such as 2 per cent or 1 per cent.

The redemption features are not mutually exclusive.

A small amount of original issue discount (OID) is sometimes used in the bond market to ensure a successful syndication where needed. For deals that are otherwise not saleable, typically, if an underwriter is selling securities to refinancing a bridge facility, large amounts of OID may be offered to investors.

Offerings

How are high-yield debt securities offerings launched, priced and closed? How are coupons determined? Do you typically see fixed or floating rates?

The timeline of a typical high-yield offering is as follows. An offering is launched by the distribution of the ‘red’ (ie, the preliminary offering memorandum or prospectus) to investors, which is often accompanied by a press release.

For a debut issuer or a significant transaction, the issuer may then go on the road to meet with investors while the banks are building the book. A formal roadshow can be as short as three days and as long as two weeks. The bankers will determine the length of the roadshow and will instruct accounts that books will close by a certain time on the last day of the roadshow, which is the deadline for submitting an order in the security. After the books have closed, the bankers will schedule a pricing call with the issuer and the bankers (in their role as initial purchasers of the securities) and the issuer will agree to the terms of the deal (eg, the coupon, issue price, maturity and call schedule).

Most high-yield debt securities are issued at a fixed coupon and the coupon is determined as a result of investor demand. Many factors lead to the determination of the coupon, including the general market, the health and stability of the issuer, the issuer’s industry, the covenant package, the financial performance of the issuer and the issuer’s performance during the roadshow.

After the pricing call, a pricing term sheet is sent to investors to confirm sales, coinciding with the signing of the purchase agreement between the issuer and the initial purchasers, pursuant to which the initial purchasers agree to purchase the securities from the issuer. Once a securities transaction is priced, the securities begin trading. As part of the pricing terms, the parties will also schedule a closing date, which is typically done on a T+3 basis. Therefore, three business days after pricing, the securities offering will close and the issuer will receive the proceeds of the offering.

Note that for a repeat high-yield issuer, launch and pricing are often accelerated to a single day, known as a drive-by. In other words, the offering would launch before the market opens, followed by single or multiple investor calls, followed by pricing later that afternoon. If the market is familiar with the issuer, the need to have a formal roadshow to meet with accounts is generally not required, resulting in an accelerated process.

Floating rate notes are less common than fixed-rate notes in the London market, but they did see some popularity among issuers because they mimicked some aspects of bank loans by having less call protection and a floating rate of interest. With the resurgence of the bank loan market, floating rate notes may prove less popular.

Covenants

Describe the main covenants restricting the operation of the debtor’s business in a typical high-yield debt securities transaction. Have you been seeing a convergence of covenants between the high-yield and bank markets?

High-yield covenants always seek to strike a delicate balance. On the one hand, the covenants provide protection for high-yield investors against an issuer overextending itself or using cash unwisely. On the other hand, the covenants must provide flexibility for the issuer to operate its business and grow over the life of the high-yield debt securities. In other words, the covenants protect the investors’ ability to be paid principal and interest on the securities while preserving the issuer’s ability to run its business without undue restrictions.

The high-yield covenant package is focused on regulating the ability of the issuer and its restricted subsidiaries to service its debt and achieve the balance described above. High-yield covenants are very flexible in permitting different types of transactions between the issuer and its restricted subsidiaries or among restricted subsidiaries - in many cases, regardless of whether those restricted subsidiaries are guarantors or non-guarantors.

While each high-yield covenant package is distinct, the main covenants are as follows:

  • Limitation on restricted payments: this is often called the ‘RP covenant’. The RP covenant regulates the amount of cash and other assets that may flow out of the issuer and its restricted subsidiaries. It limits:
  • cash dividends and other distributions;
  • the redemption or repurchase of the issuer’s capital stock;
  • the redemption or repurchase of subordinated debt obligations prior to their scheduled maturity; and
  • restricted investments, which are investments that are not listed as permitted investments.
  • Limitation on indebtedness: the debt covenant restricts the amount and the type of debt the issuer can incur. High-yield investors, on their side, care very much about leverage and, when analysing an issuer, will often ask themselves: ‘How much debt am I comfortable letting the company put ahead of me?’
  • Limitation on liens: the lien covenant is focused on protecting the high-yield investors’ position in the capital structure by regulating the incurrence of secured debt that may be effectively senior to or pari passu with the high-yield debt securities and ensuring that the securities have a senior priority lien on collateral that secures any junior debt.
  • Limitation on asset sales: unlike a traditional credit agreement, high-yield debt securities do not place strict limits on asset sales. Instead, the high-yield asset sale covenant establishes guidelines that must be followed in any asset sale and permits the issuer to use the proceeds either to reinvest in the business or to prepay debt that ranks higher than or equal to the high-yield debt securities in the capital structure. If the issuer does not use the proceeds in this way, it is required to offer to repurchase the high-yield debt securities at par plus accrued interest.
  • Limitation on affiliate transactions: the limitation on affiliate transactions covenant limits the issuer’s ability to enter into transactions with affiliates unless those transactions are on terms no less favourable than would be available for similar transactions with unrelated third parties. The covenants are designed to prevent value from leaking out from the issuer to affiliates that are not subject to the covenants of the indenture.
  • Reporting: the reporting covenant is aimed at ensuring the flow of information that high-yield investors need to support trading in the high-yield debt securities, and to monitor the performance of the issuer.
  • Mergers and consolidations: the merger and consolidation covenant is designed to prevent a business combination in which the surviving obligor for the high-yield debt securities is not financially healthy, as measured by a ratio test. The covenant also seeks to ensure that noteholders will have enforceable rights against the surviving entity in a merger, consolidation or transfer of all or substantially all the assets of the issuer or a subsidiary guarantor.
  • Future guarantors: the future guarantors covenant is designed to make sure that if a subsidiary of the issuer is guaranteeing other debt, the noteholders get the benefit of that guarantee. As a result, the common formulation is that if a restricted subsidiary guarantees the bank facility of the issuer, that entity will guarantee the high-yield debt securities as well. In addition, if the issuer decides to issue new high-yield debt securities, the guarantor package will be the same across both tranches of securities. In securities where the notes are senior secured, there may also be a requirement that each material subsidiary becomes a guarantor of the high-yield securities.
  • Change of control: the change of control covenant requires the issuer to purchase the high-yield debt securities from noteholders at a price equal to 101 per cent plus accrued interest if a ‘change of control’ of the issuer occurs. The rationale for giving investors this ‘put’ right is that investors purchased the securities based, in part, on their comfort with the management or the controlling shareholders of the issuer, or both.

Note that for covenants appearing highly restrictive, there is a set of baskets and exceptions giving the issuer the flexibility it needs to operate its business and grow over the life of the high-yield debt securities. The exceptions are limitless and they are highly negotiated.

During the second half of 2015, a number of lead sponsors were able to raise bank debt on terms containing covenants more akin to those set out above than traditional European senior bank deal covenants. This trend of term loans with high-yield-style covenants continued into 2016 and 2017, with more and more loans being executed on a ‘covenant-lite’ basis with terms approaching those available in the high-yield market.

Are you seeing any tightening of covenants or are you seeing investor protections being eroded? Are terms of covenants often changed between the launch and pricing of an offering?

Tightening and loosening of covenants tends to depend on market conditions and the quality of companies coming to market. That said, various commentators and agencies that grade covenants have taken the view that covenants as a whole have loosened in the years following the collapse of Lehman Brothers in 2008.

Are there particular covenants that are looser or tighter, based on a particular industry sector?

The European high-yield market has a large telecommunications and cable sector, and issuers in that sector typically are able to obtain more covenant flexibility than in some other industries, largely because of the strong cash generation and low volatility typical within it.

Change of control

Do changes of control, asset sales or similar typically trigger any prepayment requirements?

As discussed in question 9, a change of control typically requires the issuer to offer to prepay the bonds at 101 per cent plus accrued interest. Of course, if the trading price of the bonds increases (ie, above 101 per cent) after announcement of a change of control, then holders will most likely elect not to put. In other words, if the bonds trade up, that typically means that the investors are comfortable with new management or the new owner and would prefer to stay invested in the bonds, but the issuer must still make the offer to the investors.

Asset sales only trigger a prepayment obligation at par plus accrued interest if the issuer does not use the asset sale proceeds in a manner permitted by the asset sale covenant (ie, use the proceeds to reinvest in the business or pay down debt). If an issuer is unable to apply the net proceeds of an asset sale in the manner and in the time allowed under the covenant, it must then make an offer to acquire the bonds at par plus accrued interest once the excess proceeds reach a negotiated threshold. If the offer is oversubscribed, then the issuer must purchase the bonds on a pro rata basis. If the offer is undersubscribed, then the issuer can use the remainder for general corporate purposes, and the excess proceeds amount is reset to zero.

Do you see the inclusion of ‘double trigger’ change of control provisions tied to a ratings downgrade?

The double-trigger concept based on ratings has been found in some deals, particularly in the telecommunications and cable area. However, much of the focus in the London market has been on a double trigger based on leverage levels rather than ratings. For a period, many sponsor-backed deals had this feature, especially if the high-yield securities were issued in contemplation of a possible exit in the near future. It has now spread more widely in the market and has become an increasingly common feature.

Crossover covenants

Is there the concept of a ‘crossover’ covenant package in your jurisdiction for issuers who are on the verge of being investment grade? And if so, what are some of the key covenant differences?

Yes. Crossover covenant packages have been provided for issuers with split high-yield or investment grade ratings from rating agencies as well as issuers on the cusp of being investment grade, and in some cases to issuers that have strong fundamental credit characteristics that are not reflected in their ratings. Crossover packages vary widely, some resembling investment grade packages and some adding additional features such as limitations on indebtedness rather than just a negative pledge clause.

Regulation

Disclosure requirements

Describe the disclosure requirements applicable to high-yield debt securities financings. Is there a particular regulatory body that reviews or approves such disclosure requirements?

High-yield debt securities arranged in the London market are typically sold to institutional or other sophisticated investors through various private placement exemptions. Securities sold into the United States are sold in reliance on the Rule 144A exemption (see question 1). As a result, the securities do not need to comply with the requirements for securities that are publicly offered and sold within the United States.

Nevertheless, high-yield securities typically strive to meet this standard. Investment banks and issuers are concerned to ensure that they present a full package of information to investors such that investors can make informed investment decisions about the issuer. Rule 10b-5 will apply to securities sold within the United States. The rule makes it unlawful for any person to make an untrue statement of material fact, or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. As a result, issuers and investment banks are keen to include all information that would be required in a regulated offering, unless the conclusion can be safely reached that it is not material despite that regulatory requirement.

In addition, a listing on a stock exchange will require issuers to meet stock exchange listing requirements. Given the high level of disclosure in a high-yield offering memorandum, any additional information required by a stock exchange will usually be only incremental.

Use of proceeds

Are there any limitations on the use of proceeds from an issuance of high-yield securities by an issuer?

None other than in violation of any anti-terrorism, anti-money laundering or similar law, or general corporate laws.

Restrictions on investment

On what grounds, if any, could an investor be precluded from investing in high-yield securities?

As noted above, offerings of high-yield securities are typically made only to sophisticated investors in reliance on exemptions from laws restricting the offering of securities. Securities are usually offered into the United States in reliance on Rule 144A under the Securities Act of 1933, which allows private resales to qualified institutional buyers. Securities sold in the United Kingdom will be offered only to specified categories of persons, including certain investment professionals, high-net-worth companies and so on. To qualify for the most favourable private placement treatment with the EU, high-yield securities are frequently issued with a minimum denomination of £100,000 or €100,000.

Closing mechanics

Are there any particular closing mechanics in your jurisdiction that an issuer of high-yield debt securities should be aware of?

High-yield securities are typically cleared through Euroclear and Clearstream in the same manner as other securities.

Guarantees and security

Guarantees

Outline how guarantees among companies in a group typically operate in a high-yield deal in your jurisdiction. Are there limitations on guarantees?

The United Kingdom is generally a friendly jurisdiction in its ability to grant guarantees. Often, a high proportion of the issuer’s subsidiaries will be able to guarantee the high-yield notes. Financial assistance rules still apply in the case of public limited companies.

Collateral package

What is the typical collateral package for high-yield debt securities in your jurisdiction?

It is relatively simple to take security in favour of high-yield securities and their guarantees. A typical package for senior secured notes would consist of a pledge of the shares of the issuer’s material subsidiaries, intercompany receivables and bank accounts, often captured in an English law-governed all-assets debenture, which usually includes a floating charge (see question 20). Sometimes further asset security is given, for instance, in companies with a portfolio of real estate.

Limitations

Are there any limitations on security that can be granted to secure high-yield securities in your jurisdiction? Are there any limitations on types of assets that can be pledged as collateral? Are there any limitations on which entities can provide security?

England is generally a friendly jurisdiction for the grant of security. Among others, a floating charge may be granted over the entirety of a company’s enterprise, and an equitable charge may be granted over future property that the chargor does not yet own. High-yield securities do not suffer from any particular limitations that do not apply to debt generally. There are no general limitations on the type of security an English private limited company or public limited company can provide, although if the entity granting security is a limited liability partnership (LLP), there are certain other factors that need to be considered; for example, LLPs are also required to register the security they create at Companies House (see question 24).

Collateral structure

Describe the typical collateral structure in your jurisdiction. For example, is it common to see crossing lien deals between high-yield debt securities and bank agreements?

Crossing liens are uncommon. Typically, security is shared pursuant to the terms of an intercreditor agreement that regulates the ranking of the security in enforcement or insolvency situations and covers questions as to the right to direct enforcement and any standstills or consultation required among different creditor groups.

Legal expenses

Who typically bears the costs of legal expenses related to security interests?

Typically, the issuer pays such expenses.

Security interests

How are security interests recorded? Is there a public register?

Recording of interests depends on the type of asset subject to the security interest. In general:

  • a legal mortgage over real estate that is registered must be registered at the Land Registry; a legal mortgage over unregistered real estate is registered at the Land Charges Department, although there may be an obligation to register such real estate as a consequence of creating such legal mortgage; an equitable mortgage may be registered and it is recommended that such registration is made to protect the priority position of the security being created;
  • security over assets such as bank accounts, shares and intercompany receivables and other non-possessory security created by an English company must be registered at Companies House within 21 days of its creation. Failure to register in time results in the charge being void against a liquidator, administrator or creditor of the relevant English company creating the charge;
  • a charge of registered intellectual property may be registered at the appropriate patents, trademarks or design registry at the UK Intellectual Property Office; and
  • security over assets such as aircraft or ships, agricultural charges and security given by individuals are subject to a separate registration regime, which depends on the asset being secured and the entity granting security.

How are security interests typically enforced in the high-yield context?

Security for high-yield securities that are junior in the capital structure is rarely enforced; typically, in an enforcement scenario, the senior secured bank loans or other instruments ranking ahead in the capital structure will control the process and therefore enforcement. However, the security interest in favour of the high-yield securities still has a role: to enforce efficiently in a sale to a third party, that security will have to be released so that the buyer can purchase an asset free of competing security. This release in turn will require the enforcing creditors to comply with whatever requirements are imposed by the intercreditor agreement to allow that release.

These requirements are designed to protect the high-yield investors and may include, among others:

  • the need for a fair market value opinion to be obtained in relation to an enforcement sale;
  • the need for consultation to take place with the high-yield investors or their representative; or
  • that an auction process be held, sometimes with a requirement that the high-yield investors be entitled to participate in that auction.

Security for senior secured notes is enforced by the holders of a sufficient principal amount of the securities directing the security agent to enforce in accordance with the provisions included in the intercreditor agreement. An auction process is often conducted by the security agent.

Debt seniority and intercreditor arrangements

Ranking of high-yield debt

How does high-yield debt rank in relation to other creditor interests?

It is entirely dependent on where in the capital structure the high-yield debt is intended to sit. In the case of senior secured notes, the high-yield component will, in principle, rank equally with other senior secured debt, although the high-yield note holders may be pursuant to an intercreditor arrangement agreement that certain super senior debt may be recovered first from the proceeds of enforcement. Super senior debt may include a limited revolving credit facility or hedging, for example. In the case of high-yield that is designed to rank after senior secured bank loans, the high-yield securities are often issued from a holding company of the bank debt borrower, and so are structurally subordinated to the bank debt. Guarantees will be provided from the bank debt borrower and its subsidiaries that guarantee the bank debt, but these guarantees will typically be provided on a senior subordinated basis, pursuant to which they rank behind the bank debt and are subject to certain limitations on enforcement.

Regulation of voting and control

Describe how intercreditor arrangements entered into by companies in your jurisdiction typically regulate voting and control between holders of high-yield debt securities and bank lenders?

For senior secured notes, an intercreditor agreement will typically provide for sharing of the collateral with certain classes of future debt and hedging, as well as any revolving credit facility and senior term loan facility existing at the time of issuance. The intercreditor agreement will often provide for a majority vote across all senior secured creditors to control the enforcement of collateral. The super senior lenders, if any, may also have a separate right to enforce if the senior secured creditors do not take action within a certain period of time to enforce.

For senior notes with senior subordinated guarantees provided by the issuer’s subsidiaries, the guarantees will be subject to an intercreditor agreement made with the representatives of the other debt in the structure, usually senior secured bank debt. The guarantees will be subject to restrictions on payment if the bank debt has suffered from a payment default or if a limited blockage period, typically 179 days, has been invoked by the bank debt lenders due to a default under their instrument. The high-yield investors also agree to receive proceeds from an insolvency proceeding only after the bank debt has been repaid, and to be subject to an obligation to turn over payments received on their guarantees in violation of the intercreditor agreement. The guarantees will also usually be subject to a 179-day standstill period after default before they can be enforced.

Tax considerations

Offsetting of interest payments

May issuers set off interest payments on their securities against their tax liability? Are there any special considerations for the high-yield market?

Generally speaking, interest on debt is deductible, subject to various exceptions. The Treasury recently consulted on several questions as to the tax deductibility of corporate interest expense including, among other things, proposals for a discussion on the possibility of a cap on deductibility based on a ratio of interest expense to earnings before tax, depreciation and amortisation.

Tax rulings

Is it common for issuers to obtain a tax ruling from the competent authority in your jurisdiction in connection with the issuance of high-yield bonds?

No, this would be uncommon.