Welcome back to Fox Legal Training's Primary Market Education Series! In this instalment, we'll explore covenant analysis techniques using two deals in the primary market this week: ASK Chemicals and Omnia Technologies. By comparing these deals, we'll demonstrate how covenants can be structured to offer more flexibility for borrowers or more protection for lenders.
1. Redemption Provisions:
Summary: Different deal structures lead to distinct redemption provisions.
ASK Chemicals:
- Fixed-rate notes
- Features 10% at 103 redemption option
Omnia Technologies:
- Floating-rate notes
- Typically non-call for one year; would not expect to see additional redemption flexibility
2. Debt Covenant Analysis:
Summary: Omnia Technologies offers more flexibility in debt capacity through the conversion of Restricted Payments capacity.
ASK Chemicals:
- Does not include an Available RP Amounts Basket
Omnia Technologies:
- Includes an Available RP Amounts Basket
- Allows conversion of Restricted Payments capacity into debt capacity
3. Secured Debt Capacity:
Summary: Omnia Technologies has significantly higher Permitted Liens general basket.
ASK Chemicals:
- Greater of €20 million or 22% of Consolidated EBITDA
Omnia Technologies:
- Greater of €49 million or 40% of Consolidated EBITDA
4. Restricted Payments Covenant:
Summary: ASK Chemicals contains a more protective Restricted Payments builder basket style compared to Omnia's more flexible approach.
ASK Chemicals:
- Traditional style builder basket
- Based on 50% of Consolidated Net Income, less 100% of losses
- Losses cannot take the value of the basket below zero
- Ratio Test Condition stronger with a Fixed Charge Coverage Ratio of 2.7x (higher than typical 2x)
- Strong no default or Event of Default blocker
Omnia Technologies:
- More flexible builder basket
- Based on 50% of Consolidated Net Income, no mention of losses
- Always increases, never decreases as no value will be less than zero
- Ratio Test Condition standard with a Fixed Charge Coverage Ratio of 2x
- Weak default blocker: No Event of Default under payment and insolvency prongs only
5. Financial Calculations Covenant:
Summary: Omnia Technologies offers broader financial calculation flexibility compared to ASK Chemicals' limited flexibility.
ASK Chemicals:
- Limited flexibility
- Option to calculate capacity at commitment date or closing date of a transaction
- No “Super Grower” (which adjusts the fixed amounts of fixed/grower baskets up in line with the grower, but not back down again)
- Less expansive EBITDA add-backs
Omnia Technologies:
- More flexibility
- Option to calculate capacity at any relevant date inrespect of a transaction
- Expansive EBITDA add-backs (forward-looking synergies)
- Includes a “Super Grower”
In sum, the ASK Chemicalsdeal offers a tighter, more protective covenant package compared to the Omnia Technologies deal. This comparison demonstrates how different covenant terms across the covenant package can be used to benchmark flexibility across deals.
Remember, this analysis focuses solely on covenant flexibility and is not a comprehensive analysis of all features of the deals relevant to an investment decision. For a complete investment case, consider all aspects of the offerings, including the credit, who owns it, where they operate, the industry, etc. – you know the drill.
For more information or to access the full offering memoranda, please visit the Fox Legal Training online covenant training platform or contact Sabrina at sabrina@foxlegaltraining.com.