High-yield analysts last week slammed the terms of the bond that will help finance ThyssenKrupp Elevator's buyout by a private equity consortium led by Cinven and Advent, but sources close to the deal say investor reception is very strong.
TKE on Wednesday launched the €4.05bn-equivalent bond section of the financing package for the €17.2bn buyout of ThyssenKrupp's elevator business – one of the biggest LBOs in the past decade.
Despite investor hopes that the market slump over the past few months might give them a leg-up in deal protections, high-yield analytics company 9fin and credit research firm Covenant Review said TKE's bond includes terms that do a disservice to investors.
"With a notably aggressive covenant package riddled with sponsor-friendly features, the offering dashes hopes for a coronavirus-driven market shift to tighter terms," wrote Covenant Review analysts.
TKE's bond includes some of the weakest covenants seen in the market, said 9fin analysts.
"Purely from a covenants perspective this deal is the worst of any deal we've ever reviewed," wrote 9fin analysts.
"Frankly, we'd be amazed if the deal was underwritten on these covenants."
If the bond goes through, other private equity firms may be emboldened to include similarly weak investor protections, said Steven Hunter, chief executive at 9fin.
Hunter said TKE's investor protections were weaker than deals for both Merlin and Refinitiv, two buyouts that also raised investor hackles.
But despite buysider grumbles, both of those LBOs ended up sailing through the market, and have traded up in secondary.
IN REVERSE
A source familiar with the TKE deal said he was hearing of a "monster reverse" enquiry for it.
And even Hunter acknowledged that, "ultimately, legals are secondary to the credit".
"ThyssenKrupp is a big business, a decent business and maybe investors will take comfort in that," he said. "But if this deal ever goes wrong, bondholders will be in serious difficulty because sponsors have so many ways to extract value."
One high-yield investor looking at the bond agreed that the terms were aggressive.
"TKE is pretending we're back in the heyday of January 2020, with record tight spreads," he said.
"This will be a test of whether demand for high-yield bonds is so rampant that investors are willing to pretend that the market is at a standard set in January."
EARLY INDICATIONS
The marketing process is still at an early stage with calls taking place until July 1. But early indications suggest the deal is on course to generate enough interest despite the terms.
In euros, TKE is preparing a €750m seven-year non-call three senior secured, a €1bn seven-year non-call one senior secured floating-rate note and a €650m eight-year non-call three senior.
The US dollar tranches are flagged as a €1.25bn-equivalent seven-year non-call three senior secured and a €400m-equivalent eight-year non-call three senior.
The company is also marketing a €3.05bn-equivalent loan for the buyout.
"It will be curious to see whether there's pushback," said the investor. "ThyssenKrupp will be able to play loans off against bonds. It will be down to the combined willingness of ... debt providers to see how willing they are to accept these terms."
PUSH-BACK
9fin analysts suggested investors should prioritise pushing back on the deal's flexibility around restricted payments, permitted investment and asset sales.
Typically when a company sells assets, bondholders expect some of the proceeds to be used either to repay debt or that the cash will be kept within the company.
Some deals, typically sponsor-led, include provisions that say if the business reduces leverage or its performance improves, it can pay proceeds from asset sales as dividends, said Hunter.
TKE's deal includes a "host" of asset sale carve-outs which, on 9fin's reading, allow essentially unlimited asset sale proceeds to be paid out.
"TKE has pretty vast flexibility to pay out proceeds from asset sales as dividends," said Hunter.
"That is egregious. People can understand that private equity wants returns – but having that flexibility on day one is a bit unusual."
J.CREW FLEXIBILITY
US issuers such as J.Crew, PetSmart and Neiman Marcus have famously used weak covenants to shift assets out of bondholder reach in the past.
TKE's bond has J.Crew-style flexibility which allows permitted investments in unrestricted subsidiaries that can subsequently be used to buy back capital stock, said 9fin analysts.
The clause effectively means that the deal's permitted investments capacity and restricted payment capacity are interchangeable, they said.
"A simple place [for investors] to start would be having a secured leverage test as a blocker for asset sales-related [restricted payments/permitted investments]."
The bond also gives TKE significant capacity to add secured debt – greater than the enterprise value of the company itself, said analysts.
Other weaknesses includes a "material event of default" concept, which means that cash can leak out of the group even where an event of default has occurred.
The three global coordinators and bookrunners for the bond are Barclays, Credit Suisse and Goldman Sachs. Barclays is B&D on the euro senior, Credit Suisse is B&D on the euro secureds and Goldman Sachs is B&D on the US dollar tranches.
Deutsche Bank, RBC and UBS are bookrunners.
Spokespeople from Credit Suisse, Deutsche Bank, Goldman Sachs and UBS declined to comment. Spokespeople for TKE, Barclays and RBC did not respond to requests for comment.