The recent announcement of the potential sale of McLaren Automotive business has sparked interest among investors and lenders alike. According to reports, the sale is expected to bring in new investment and could value the company at around £2.5 billion1. The deal is said to involve a non-controlling stake in McLaren Group, with the Bahrain-based Mumtalakat investment fund, TAG Group, and Mansour Ojjeh, a Saudi-born businessman, considering a sale of their stakes1.
What are the implications under McLaren’s covenants for its outstanding bonds? In this blog, we break this down and provide a step-by-step guide on how to conduct a covenant analysis when such a sale is announced. For those who prefer to do their learning via video, you can see our founder, Sabrina Fox, discuss the transaction on our YouTube channel.
Understanding the Transaction
The sale of the McLaren Automotive business involves a non-controlling stake in McLaren Group, which is also up for auction. To understand the covenant implications of this deal, it is essential to understand the nature of the McLaren Automotive business in the context of the wider organization, and to review the final offering memorandum for McLaren’s outstanding bonds – or, better yet,the indenture itself.
Conducting the Covenant Analysis
When analyzing the sale of an asset by a high yield issuer to a third party, several key factors need to be considered:
- Is the third party already a permitted holder or an affiliate of a permitted holder?
- Does the asset itself fall within the definition of asset disposition?
- What are the requirements of the asset sales covenant?
- What are the triggers for the change of control covenant?
Asset Sales Covenant
The Asset Sales covenant requires the borrower to obtain not less than fair market value, 75% cash and cash equivalents, and apply the proceeds in a specific manner. The covenant also outlines the requirements for excess proceeds, including the Excess Proceeds Offer provisions.
Change of Control Covenant
One of the triggers in the Change of Control definition is a sale of all or “substantially all” assets. This is a facts and circumstances analysis, requiring consideration of the context behind the asset and its significance to the borrower's business.
Guidelines for Determining Substantially All Assets
To determine if “substantially all” assets are implicated in the sale, the following guidelines can be used:
- Sales of assets that manifest a significant change to the nature of the business
- Assets that are a significant proportion of the borrower's assets, revenue, or EBITDA
- Assets that are considered the "crown jewel" of the borrower
Proactive Covenant Analysis is Key
Covenant analysis is a critical tool for lenders to understand the documentation implications of a transaction. For the sale of an asset, only by analyzing the “Permitted Holders” definition, “Asset Disposition” definition, Asset Sales covenant, and Change of Control covenant, can parties fully understand the risks and opportunities associated with a deal.
Conclusion
The covenant implications of the potential sale of McLaren’s Automotive business will require more information and a careful analysis of the terms. By following the guidelines outlined in this blog, lenders and investors can conduct a thorough covenant analysis and better understand the implications of this deal, or indeed, future asset sales by high yield issuers.
Learn More
For those interested in learning how to conduct covenant analysis, Fox Legal Training offers online courses and resources on how to conduct this analysis. Visit www.foxlegaltraining.com to learn more about our first-of-its-kindcovenant education platform.
(1) www.evo.co.uk/news/207313/potential-sale-of-mclaren-automotive-imminent