Recordati's 102% Call: What does an asset sale unlock?

Recordati's preliminary terms include a call at 102 following a "Specified Asset Disposition." The question for lenders is what has to happen before the Issuer can use it, and how much of the notes it can then redeem.

Respighi HoldCo is marketing the notes to finance the take-private of Recordati by CVC and GBL. FLT’s Primary Market Education Series review covers ten notable features of the documentation, from the acquisition structure and security package to restricted payments and voting.

What does the call permit?

At any time following a Specified Asset Disposition, the Issuer can redeem any of the four fixed-rate series, euro and dollar, in whole or in part, at 102. That's 102% of principal, plus accrued and unpaid interest and any Additional Amounts.

Neither the 102% call nor the Specified Asset Disposition provision is a new feature – it’s the combination and the lack of a cap that’s notable.

There's no cap tying the amount redeemed to the proceeds of the disposition, and no time limit for using the call after it. The listing call described in the prelim immediately above it, by comparison, is capped at the Net Cash Proceeds of the Listing. Each redemption under the asset-disposition call also requires the Issuer to cancel RCF commitments in proportion to the notes redeemed, up to €500 million in aggregate and subject to exceptions.

Because the call is available at any time, it applies during the non-call period, when the alternative is the make-whole. It can also apply after the first call date, if the scheduled call price is above 102. Those call prices are blank in the preliminary terms, of course.

A redemption right linked to an asset sale doesn't necessarily limit the Issuer to the sale proceeds, or expire shortly after the sale – these aspects are worth lenders’ consideration.

Follow the defined term

"Specified Asset Disposition" covers a disposition of all or part of either the Specialty & Primary Care business or the Rare Diseases business, to the extent the Issuer designates it. It isn't limited to a sale: the definition also lists a demerger and a spin-off.

The definition excludes "the sale of both such businesses." It doesn't require the disposal of a whole business, so a qualifying disposition of part of either business could open the call.

The defined term is also used outside the call. Guarantees from subsidiaries whose shares or assets are Specified Assets are released, and so are liens over Specified Assets. A Specified Asset Disposition, and the intermediate steps to implement it, isn't a Change of Control or a disposal of all or substantially all of the group's assets, and the merger covenant doesn't apply to it.

What should lenders ask?

The value of the option to the Issuer depends on how 102% compares with the price it would otherwise pay. Before the first call date, that's the make-whole, which depends on the coupon, the relevant discount rate and the time remaining to the first call date.

The questions for this deal:

1. Should a disposition of only part of either business be enough to activate the call?

2. Should the amount redeemable be limited to the proceeds received?

3. Should the right expire a set period after the disposition?

The terms are preliminary, so we'll see whether investors push back. Where your own documents include a special redemption route, read the trigger, the amount limit and the time limit together with the call price, and check which guarantees and liens are released on the same trigger.

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