When I conduct a Red Flag Review for a refinancing deal, I always check for the changes compared to the deal being refinanced. Sometimes these can be extensive, especially if the borrower hasn’t issued in a while, the market has shifted, or ownership has changed hands.
But sometimes, like in Engineering Group’s senior secured notes deal being marketed this week, there are very few changes. This means the review focuses on the most important modifications from the previous deal, and I focused on three critical areas:
EBITDA Definition Expansion
The new deal expands the EBITDA add-backs for those included in the pro forma financials section of the OM. This is a commonly seen add-back, but this one extends it to:
- Run rate adjusted EBITDA from the current offering memorandum, and
- Elements from both 2028 and 2026 notes
This expansion increases financial flexibility and requires lenders to carefully analyze these add-backs to get a sense of their impact on future covenant calculations.
RCF Structural Changes
The revolving credit facility is updated:
- Size increased by €10 million
- Extended maturity to 2028
- Maintained super-senior position
These modifications enhance liquidity while preserving the existing priority structure.
Security Package Contingencies
I noted in my YouTube video conducting the Red Flag Review that the Italian Golden Power Clearance requirement is a key risk. If this clearance is not received, the notes will be unsecured. It would be prudent for lenders to query this.
I also noted that guarantor coverage, which hovers around 50% on each of the standard metrics, is low for market, raising risks of future structural subordination.
Conclusion
In the context of a refinancing, each change to the terms requires an analysis of its impact on potential risk. The changes in this deal, while few, introduce new considerations for covenant calculations and notes security.
We will come back next week with another session of our Primary Market Education Series! If there is a deal you would like us to analyze, send it to sabrina@foxlegaltraining.com.