Key Provisions to Watch in Primary Market Deals: Insights from the Sammontana Italia LBO

As part of Fox Legal Training’s Primary Market Education Series, I analyze primary market deals to highlight important provisions for lenders and other market participants. In this post, we'll examine some key aspects of the Sammontana Italia LBO deal.

Company Overview and Capital Structure

Sammontana Italia, operating in the Italian frozen bakery and ice cream markets, operates 12 factories across Italy, France, and the United States. They have an M&A track record and may pursue future acquisitions. The deal involves refinancing a bridge loan, with a €140 million super senior revolving credit facility outstanding on day one.

The capital structure is relatively simple, consisting of floating rate high yield notes and the RCF. Guarantor coverage is strong at 97% based on assets, reducing concerns about structural subordination. However, it's important to note that enforcement proceeds will be distributed to the RCF before the notes, presenting some contractual subordination.

Security and Collateral

The security package primarily consists of soft security, with one exception: all-asset security granted by Bindi North America. Given that the company has factories in Italy and France not included in the collateral, lenders should analyze Permitted Liens capacity to understand the potential for future debt secured on assets that do not comprise collateral – as these reflect effective subordination risk.

Key Covenant Provisions

1. Debt Covenant: Most material baskets can be secured on the collateral, and several can be secured by Permitted Liens on non-collateral assets. This flexibility warrants close attention, given the nature of the collateral package and the other assets that the borrower owns.
2. RCF Super Senior Capacity: While initially €140 million, this could increase to the greater of €180 million and 100% of Consolidated EBITDA in the future.
3. Restricted Payments Covenant: The definition of Restricted Payment will allow the issuer to service interest payments on potential subordinated debt incurred in the future. The builder basket has a zero floor, meaning losses won't reduce the basket below zero - a trend seen in recent deals.
4. Financial Calculations Covenant: Provides significant flexibility for the borrower, including full run-rate synergies and forward-looking synergies in respect of purchases, sales and “Group Initiatives” without caps or time horizons.
5. Portability Clause: Available once for the first Change of Control, with a consolidated net leverage ratio threshold of less than 4.7x.

Analyzing Primary Market Deals

When conducting Red Flag Reviews of primary market deals, it's crucial to:

1. Understand the company's business and future plans
2. Examine the capital structure, guarantor coverage and potential structural subordination risks
3. Analyze the security package and understand what else the borrower owns, and what can be pledged to other lenders
4. Review key covenant provisions, paying attention to basket sizes and noting clause numbers to follow cross-references
5. Consider how the deal structure might evolve if the borrower accesses capacity during times of stress

By focusing on these areas, lenders and market participants can better assess the risks and opportunities presented by primary market deals.

For more detailed analysis and access to fully annotated offering memoranda, visit the Fox Legal Training website or contact sabrina@foxlegaltraining.com.

- Sabrina Fox, Founder, Fox Legal Training