Capsugel's initial terms demonstrate the fifteen-year shift in lender protections – Part 2

In Part 1, I walked through what fifteen years did to the Optional Redemption, Debt, and Restricted Payments covenants in Capsugel's documentation, comparing the 2011 unsecured bond against the senior secured deal marketed last week. In this part 2, we continue the review of how, provision by provision, the borrower gained flexibility with the loan market's fingerprints all over the bond.

Below I review key changes to Asset Sales, Change of Control, and a handful of individual differences and defined terms. As before, I'm not going to tell you whether these terms are good or bad. Instead, my intention is that when the next preliminary DoN lands on your desk, you are equipped to decide which terms stay and which are worth resisting.

Asset Sales – The box springs a leak

Think back to the box from Part 1 – the idea that some portion of value stays inside the restricted group for the benefit of lenders. The Asset Sales covenant also protects those walls, and it’s developed some leaks.

In 2011, proceeds from an asset sale had somewhere value accretive to go. The borrower could repay senior debt, reinvest in the business, or fund capital expenditure. If it did none of those things within 450 days, the leftover cash - Excess Proceeds - had to be offered to bondholders at par. Restricted Payments were not on the menu. You could not sell an asset and use the cash to pay dividends.

In 2026, subject to Restricted Payments capacity (see Part 1), you can. The application of proceeds litany now includes Restricted Payments right alongside debt repayment and reinvestment, an option at the borrower's sole and absolute discretion. The old version was more like a one-way valve – value didn’t leave, it got redistributed within the box. This single change turns the valve into a door, and the borrower holds the key.

That’s not all. The portion of proceeds required to be offered back to bondholders now steps down with leverage - just like the mandatory sweep in a leveraged loan. Above 4.65x senior secured net leverage, the full amount is swept. Between 4.40x and 4.65x, half. Below 4.40x, nothing at all - there is no offer. On top of that, the reinvestment runway stretched from 450 days to 545, with two further 180-day extensions available if the borrower has signed a commitment. Add in the declined and waived amounts that loop back into the Restricted Payments baskets, and the picture is complete: asset sale proceeds in this deal are far more likely to leave the box than to stay in it.

Change of Control – Mind the backdoor

Change of Control protections are amongst the most sacred to lenders. If the company is sold, or someone takes a majority of the voting stock, bondholders get the right to revisit their investment decision - if they don’t like the new owners, they can put their bonds back at 101%. On its face, in Capsugel's 2026 deal this remains.

Mostly.

The 2026 documentation carves a long list of Permitted Transactions out of the Change of Control definition entirely - holdco insertions, debt pushdowns, IPO pushdowns, tax restructurings and the steps that go with them. A sponsor can move the structure around above the issuer, and provided it travels through one of those defined channels, no put is triggered. On the whole, I’m not too bothered.

However, if the Merger covenant is the channel of choice, the picture looks a bit different because it has been loosened as well. The financial test that used to stand as a condition for an issuer-level merger is just gone - the relevant clause reads "reserved" - a clue that some protection has been removed. The menu of jurisdictions a successor entity can be incorporated in grew to include the United Kingdom, Japan, Australia, Switzerland and Norway. If a transaction is structured within the Merger covenant, no Change of Control.

None of this means the put will never pay out. It means the put protects against a narrower set of facts than it appears to, and the gap between what it looks like and what it does is much wider than before.

The Rest of the Story – Small print, real consequences

Let’s not forget defined terms and a handful of other important differences…

Start with EBITDA, because EBITDA is used for every ratio and soft cap, so a generous EBITDA definition loosens capacity across the covenants. The 2011 deal let the borrower add back cost savings from actions taken within twelve months. The 2026 deal extends that window to thirty-six months, adds in "Approved Adjustments" drawn from the offering memorandum and any quality of earnings report without further diligence, and even contemplates adding back the projected value of contracts the borrower hopes to win. Every one of those additions makes the same EBITDA figure bigger, and capacity in the deal moves with it.

Then there is the slow disappearance of guarantees. The trigger that forces a subsidiary to guarantee the bonds was narrowed so far that a subsidiary can guarantee a good deal of the borrower's other debt without ever guaranteeing yours. An investment grade rating, even if it comes and then goes, can still release operating company guarantees on the way through.

Finally, look at who controls the bonds in a stress scenario. The 2026 deal introduces Net Short provisions, which can disenfranchise a holder who is hedged or short, and a close-out mechanic that treats a 75% tender as binding on the remaining 25%. Neither existed in 2011, and both shift bargaining power away from a dissenting minority and toward the borrower and the majority.

Part 2 Conclusion: The prelim is the opening position

Let’s think back to how this comparison started. Everything I described across both parts came from the preliminary description of notes, and several of the most aggressive terms were pared back before the deal was priced. The contribution debt multiple, the ability to draw debt capacity from the Restricted Payments covenant on a 2x basis, the carry-forward on the 10% at 103% basket - all negotiated out by lenders.

That is the lesson, and it is a hopeful one. These terms are not handed down from on high. They are negotiated documents, and the borrower and its sponsor understand every line of them. The lender who understands them just as well is the lender who gets to push back.

Take the next preliminary draft you read as an opening position, not the final word.