The Provision Kantar Wishes It Had

The Asset Sales covenant doesn't get the attention the Restricted Payments and Debt covenants tend to attract, but the application ofproceeds provisions do a lot of heavy lifting. They determine what the borrower must do with the proceeds of an asset sale, and how much flexibility it has to use them for other purposes.

Kantar's preliminary OM for the 2030 notes is a clear illustration of how much a single provision can change this outcome, so I walked through it in the latest edition of the Primary Market Education Seriesand compared it to the case study deal from our flagship course, the Leveraged Finance Covenant Training.

Kantar's Asset Sales covenant begins in the traditional way. Consideration must be at fair market value, and at least 75% of it must be cash or cash equivalents. The application of proceeds provision itself is pretty lender protective - the borrower can repay certain categories of debt, reinvest in additional assets, or any combination of the foregoing. It can also enter into a binding commitment to do one of those things and then has an additional period to apply the proceeds. The 365 days plus the 180 extension upon signinga binding commitment to apply proceeds is effectively the longest period lenders must wait to see what the issuer is going to do. Following this, if proceeds remain above the Excess Proceeds threshold, they must be offered at par to bondholders.

After that it does get more borrower-friendly compared to traditional high yield bonds (e.g., the ones I drafted in the “baby lawyer days”). Kantar is permitted to apply just 50% of the total amount if it can meet the 4x ratio test, and the other 50% it could apply to other purposes, including to make Restricted Payments. But on its current leverage, it's a ways off from being able to avail itself of this flexibility.

Our case study deal, Modulaire, is a different story altogether. The fair market value requirement is still there, as I'd expect, but the 75% cash requirement is completely removed - so it doesn't apply to any asset sale. The application of proceeds lists a litany of options the borrower can choose from. Two of them are similar to Kantar - a provision around repayment of debt and one around reinvestment in assets. But the third option is far more favorable to the borrower, as it allows those proceeds to be used for Restricted Payments or Permitted Investments. It would need the available RP capacity to do that, and in Modulaire there's quite a lot, so with this provision it could use the proceeds for that purpose straight away.

That one application of proceeds clause makes a huge difference to the outcome. If Kantar had it, the issuer could apply proceeds from the asset sale straight to available RP capacity. As it stands, the only way for it to unlock that RP capacity is to de-lever to 4x or less, or wait for the Excess Proceeds process to play out and see what’s left over.

It's a concrete example of how vastly different outcomes can arise from the presence or absence of one of these provisions - in this case, the option to apply asset sale proceeds to Restricted Payments and Permitted Investments. It's easy to miss, but it determines whether those proceeds are available for sponsor distributions right away or only after a real reduction in leverage.

This is one of the topics we teach in the Leveraged Finance Covenant Training course, our flagship offering for levfin professionals. To find out more, contact us at info@foxlegaltraining.com.

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