The New Trend: The novel provision goes, but the broader flexibility stays

Earlier in the week, I wrote about how Recordati could not only sell Specialty & Primary Care or Rare Diseases, each about half of group EBITDA, with no change of control put, no size limit other than “not both” and no time limit, but the sale would also unlock a redemption right at 102%.

On October 29th, after lender pushback on the provision, and the flexibilities more broadly, the borrower published a raft of changes tightening terms - including removing the 102% call.

The other provisions around the sale persist - alongside what remains a very flexible set of covenants.

The pattern - extremely loose protections, including novel provisions which are ultimately removed leaving a still-borrower-friendly covenant package - is the same in all three.

InPost's preliminary offering memorandum of September 23rd had the same kind of designation, with a cap on what could be sold without a change of control offer or a merger covenant test. The capped version, at 25% measured against EBITDA, was deleted in full in the pricing supplement of October 1st. Recordati's, at about half of group EBITDA with no cap other than “not both”, is in the priced terms with only the 102% call removed.

In four weeks, the terms of (at least) three European buyout bonds were revised after launch, with the most novel provision either tightened or deleted:

• InPost: the disregard of holders party to a cooperation agreement in consent votes, deleted.

• ContiTech: the 1.75x fixed charge coverage test, raised to 2x after reported investor pushback.

• Recordati: the 102% redemption right, deleted.

Many other terms were also tightened in all three deals. Contribution debt went to 100%, from 200% at InPost and ContiTech and 150% at Recordati. The debt basket sized on dividend capacity was halved at InPost and removed at ContiTech and Recordati. InPost and ContiTech added a J.Crew blocker. Recordati widened its own to exclusive licenses and every form of transfer to an Unrestricted Subsidiary, and an exclusive license is caught even in the ordinary course or for a joint venture.

But even with all of these changes, the final terms retained significant borrower flexibility – including, in Recordati’s case, the ability to make restricted payments with the proceeds of specified asset sales.

The questions for your own book:

1. Does the specified asset sale provision increase restricted payments capacity?

2. How much of the group can be sold that way, is there a size limit, and what share of the proceeds has to be applied under the asset sale covenant?

3. Are there any other provisions that push the boundaries what's market, and which reflect the broadest flexibility in the context of the business itself?

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