Black(line) Magic: Lottomatica’s Bells &Whistles
Last week, I wrote about the magic of a blackline in the context of analysing docs for a repeat issuer or in a refinancing. Nothing else highlights key changes quite as well, as demonstrated by Lottomatica’s added bells and whistles in this week’s offering of senior secured fixed and floating rate notes.
We have grouped the changes into three categories: financial calculations, Restricted Payments, and “other” borrower-friendly features.
TLDR: Lottomatica is getting a flexibility upgrade, whilst lender protections are watered down.
Wide Flexibility to Calculate Capacity
By incorporating just a few new defined terms, the borrower is now able to calculate pretty much any capacity under its covenants for pretty much any transaction on pretty much any date it wants.
This deal adds the terms “Applicable Metric”, “Applicable Test Date”, “Applicable Transaction”, and “Applicable Transaction Date” – as we point out in the Financial Calculations chapter of our Leveraged Finance Covenant Training course, these terms together grant management wide flexibility to decide when to calculate capacity. Of course, as is standard in the leveraged finance market, management is under no contractual obligation to report these calculations to lenders.
Further, the cap and time horizon for EBITDA add-backs for pro forma synergies, cost savings (and lots more – see clause (g) of the revised definition of “EBITDA”) has been removed. As I’ve written previously, management are prone to great (and often inaccurate) optimism when it comes to such add-backs, making these caps a critical lender protection.
Finally, this deal adds a favourite of top-tier sponsor deals – the EBITDA “super grower”. Under the terms of this provision, in any clause having both a fixed and grower component, the fixed component will increase in line with the grower, but will not decrease if the grower goes down.
Next Level Restricted Payments Capacity
Enhancements to the Restricted Payments covenant give the borrower much more capacity to make dividends and investments in Unrestricted Subsidiaries.
The default blocker to the builder basket has been changed to an Event of Default blocker and only applies upon certain material Events of Default.
In the Permitted Payment carveouts, an “Available Amounts” concept has been added as an additional source of capacity, alongside higher leveraged-based ratio baskets, and an “Available Proceeds” concept added alongside the “Declined Excess Proceeds” carveout.
Clause (4) of the Permitted Payments carveouts appears to permit unlimited dividends in relation to management / employee, and operating advisor equity plans. What is an operating advisor? Do lenders want to allow unlimited repurchases of equity that they own under clause (4)?
A paragraph that will allow the borrower to use Unrestricted Subsidiaries to make Restricted Payments has been added (typically the prohibition against “indirect” Restricted Payments would block this – but additional clause (33) of the Permitted Investments definition appears to remove the distinction between Permitted Payments and Permitted Investments altogether, so I'm not sure this matters).
Permitted Investments based on a 2x Fixed Charge Coverage Ratio has been added to the ratio-based clause (31), alongside a “no worse” alternative, has been added.
The Kitchen Sink
In addition to the above, some other additional borrower-friendly features include:
- Redemption provisions that allow the borrower to use the equity claw to achieve a blended make-whole redemption price in the event of an LBO or other transaction requiring a take-out of the bonds
- Net Short Lender provisions
- Automatic reports default cure upon delivery of the late report
- No lender ability to declare certain specified defaults after two years has passed
These terms will be discussed live by our founder, Sabrina Fox, in a "red flag review" for our Primary Market Education Series, on 14 May at 8am UKT. A replay will be made available to FLT students.