ContiTech's covenant changes: what did lenders gain?

Lenders pushed back on the financing for Lone Star's buyout of ContiTech from Continental, and the October 21st supplement shows a substantial list of changes from the October 15th preliminary offering memorandum. The general debt basket was reduced from the greater of €460 million and 75% of LTM EBITDA to the greater of €250 million and 40%, and J.Crew, Chewy and Serta-style protections were added. It was encouraging to see lenders win these concessions.

For each change, the next question is whether it alters what the borrower can do at closing, limits what it can do later, or gives lenders a procedural right. Even with a long list of changes, we must ask: What did lenders actually gain?

The Synergies Cap on What?

The revised terms reduce the cap on forward-looking synergy adjustments from 30% to 25% of LTM EBITDA and shorten the look-forward period from 36 to 24 months. “Approved Adjustments” remain outside both limits, and the cap also excludes synergies of the type included in Structuring EBITDA. Structuring EBITDA is €612 million, including €161 million of savings in the offering memorandum adjustments. Tightening the cap doesn't, by itself, reduce the EBITDA figure used at closing.

What Does the Builder Basket Condition Stop?

For access to the builder basket, the amended terms add a condition that the Issuer can incur at least €1 of additional debt under the specified debt incurrence provisions, pro forma for the payment. It applies to dividends and other Restricted Payments, but not Restricted Investments, and on the marketed closing figures it can already be met.

Investments still need available capacity, but once value is in an Unrestricted Subsidiary through a permitted Investment, it can be transferred onward to a parent without being treated as an action of the Issuer or its Restricted Subsidiaries. That's a potential route around this condition, subject to the investment permissions and the restrictions on transferring Material Intellectual Property.

The J.Crew Blocker – Of What?

The blocker applies to “Material Intellectual Property”. That definition refers to the material adverse effect definition, which is linked to the group's ability to perform its principal payment obligations and takes account of anticipated additional investment. The questions for a lender should be how much harm the loss of the IP has to cause before the blocker applies, and whether expected support can be counted in that assessment.

The amended terms retain express permissions for the initial Auto Surface Solutions carve-out, including its designation as an Unrestricted Subsidiary at closing. Those permissions shouldn't be read as a blanket exemption for later transfers of Material Intellectual Property. The offering memorandum describes an expected transfer to AutoCo at fair market value, which the carve-out permission doesn't require.

The Serta Blocker – What Does the Participation Right Protect?

The new provision covers contractual payment subordination and subordination of security over all or substantially all of the collateral. It permits those actions where directly and adversely affected holders receive a bona fide opportunity to fund or otherwise provide their pro rata share of the priority debt, or where the Notes Documents expressly permit the action.

The participation terms needn't include the same backstop and certain other fees, limited jurisdictional exclusions are permitted, and the offer isn't required for a consent, waiver or amendment approved by holders of at least 80% of any series of Notes.

Using a participation right may require additional capital or participation in the new priority financing, and it isn't an absolute prohibition on priming.

Questions for your own book

1. Which EBITDA adjustments fall outside the cap?

2. Which baskets allow value to leave the restricted group, and what can the receiving entity do next?

3. Which assets does each blocker protect, and who determines materiality?

4. What can rank ahead of your debt, and what does using the participation right require of you?