The concept is a relatively new feature in European bonds, having crept over from loan-land. To date, the Available Amount has cropped up in seven European HY bond deals, all of which were sponsor-backed, namely: Arxada (Bain Capital, Cinven), Birkenstock (Catterton Partners), Ahlstrom-Munksjö (Bain Capital, Ahlstrom Invest B.V., Viknum AB), Arcaplanet (Cinven), Ceramtec (CPPIB, BC Partners), Modulaire Group (Brookfield Asset Management) and T-Mobile Netherlands (Apax, Warburg Pincus) (via “Permitted Funding”).

In this report, we dissect the Available Amount to inject some clarity into this arcane concept, lay out the potential implications for bondholders, and apply the concept in the real word by performing a case study on the April 2021 Birkenstock HY bond.

Scope-ious - how is the Available Amount built?

As mentioned earlier, the Available Amount is built with a number of components — many of which overlap with the components of the RP builder basket.

The Available Amount originates in loans where it was used like the HY RP builder basket, and was primarily built with retained excess cash flow. But the HY bonds which include the Available Amount concept have not surrendered their traditional RP builder basket, rather, they have included both concepts, giving sponsors the broadest possible flexibility.

The Available Amount can be funded directly or indirectly by, without limitation, IPO proceeds, closing overfunding, cash and cash equivalents and net cash proceeds received after the closing date. These are some of the less distinctive components (though still important, and with the potential to significantly increase the Available Amount capacity). However, there are two additional components — “retained cash” and “permitted debt” — which are the most controversial, and the most ambiguous. We focus on these two below.

Complex Building Blocks

Retained Cash

Retained cash has been included in the definition of the Available Amount in all deals to date. While sometimes it is defined (allowing us to understand what constitutes retained cash), in some cases, it’s not!

For example, in Arxada, the Available Amount builds from “(a) Retained Cash (as defined in the Senior Facilities Agreement) ...”. Typically bondholders will not be able to read the SFA to read the definition, so clearly this is problematic. Broadly speaking, retained cash refers to the sweep mechanism in loans — i.e., any excess cash flow that is not required to be applied in prepayment of the facilities under the sweep provision is “retained” and may be used for any purpose. However, “retained cash” may be defined more broadly. We have seen it include “any net cash proceeds of a disposition which are not required to be applied in prepayment of the Facilities”. As a result disposals that fall within a carve-out or amounts that fall below a de minimis threshold (as is always included in HY bonds) would be captured. Additionally, drafting in the SFA may permit all excess cash flow generated during the current financial year in which closing of the transaction occurs to be part of “retained cash” — meaning that the sweep provision would potentially not commence until the first full year following the closing date, and thereby immediately building the Available Amount in unexpected ways.

Permitted Debt

Calculating the capacity of the Available Amount becomes even harder with the inclusion of “permitted debt”, which is arguably the most controversial component of the Available Amount. The inclusion of “permitted debt” means the issuer can make uncapped debt-funded dividends / investments subject only to: (1) having debt incurrence capacity, and (2) meeting certain other conditions set out in the Available Amount basket (see further discussion below). The drafting can be, however, quite ambiguous, leaving plenty of scope for differing interpretations. Even on the most bondholder-friendly read, the flexibility is pretty staggering. The following paragraphs explore three potential readings which we have christened the (1) “funded with”, (2) “build-up”, and (3) “reallocation” interpretations.

Differing Interpretations of the Available Amount

“Funded with”

First, starting with the tightest reading, with ”tightest” being taken with a pinch of salt, the “funded with” interpretation. This reading relies on certain specific language that is included in Modulaire Group — it states that an RP can be made if it is “directly or indirectly funded from the Available Amount at the time of such Restricted Payment”. On a plain reading, this would appear to only permit an issuer to build the Available Amount with debt that has been incurred for the purpose of making the related RP that is relying on the Available Amount. In other words, the use of proceeds of the debt incurred is connected to the subsequent RP. In theory, since the use of proceeds is rubber stamped by investors providing the debt, commercial aspects would be the number one limiting factor on an issuer’s ability to do a debt-funded dividend or investment. If a company could, theoretically, increase its leverage well above 10x to fund a dividend, the question really turns on whether someone would actually be willing to lend money on that basis?

“Build-up”

Second, a more generous reading, the “build-up” interpretation. This interpretation implies that “permitted debt” operates similarly to the RP builder basket in that once debt is incurred it builds-up the Available Amount for use at any time in the future. Unlike the “funded with” interpretation discussed above, this reading suggests that there is no link between the issuance of debt and the use of the proceeds. The relevant language for this interpretation is multi-pronged, first, in the RP covenant, it merely says “funded from the Available Amount”, which is much more ambiguous than the “funded with” interpretation discussed above. Second, in the definition of the Available Amount itself, it says the amount is equal to (among others) “the sum of ... Permitted Debt” (which is defined as all the debt baskets (excluding FCCR)). On the contrary, for example, in Modulaire Group it says “the net proceeds of Permitted Indebtedness”. Since the concept originated as an alternative build-up basket in loans, it would be logical to think that the Available Amount operates in a similar manner. It builds a side “pot” of RP capacity unrestricted by leverage tests (see below) to be used at the whim of the issuer. Perhaps the argument goes that they have raised cash, they should be able to make dividends with it if they so choose? Notwithstanding any concerns about whether this really makes sense, after speaking to some partners at major law firms in London, we understand that a number of issuers and their counsel are taking this view.

“Reallocation”

Finally, the most flexible reading, although arguably the one with the most holes (Swiss cheese comes to minds), the “reallocation” interpretation. We start with the same language used in the “build-up” interpretation, but we stretch it a bit. This reading would permit the conversion of debt to RP capacity without incurring any debt whatsoever — this is a particularly difficult interpretation to reconcile. If the debt capacity is converted into RP capacity, without any debt actually having been incurred, you would expect the corresponding debt capacity to reduce in order to prohibit double counting. Some deals have included “without double counting” language either in the RP clause or in the definition of the “Available Amount”, although this is sometimes more focused on no double counting across RPs and PIs, etc.).

For example, in the somewhat similar Available RP Capacity Amount construct (or, “Pick Your Poison”), where RP capacity is converted into debt capacity, the clause typically includes a line stating that upon use there is a corresponding reduction in RP capacity. However, in all the HY deals that have featured the Available Amount so far, none have included this corresponding reduction language. This suggests that interpretations one or two are the more rational.

What is happening in real-life?

Modulaire Group’s “Available Amount” basket builds from “the net proceeds of permitted indebtedness”. While we quoted it when talking about the “funded with” interpretation, the “net proceeds of” could still be interpreted in line with either the “funded with” or the “build-up” reading as it potentially only suggests that the debt needs to be incurred first in order to produce the proceeds used for RP capacity. Alternatively, in Ceramtec, Arxada, Birkenstock, Arcaplanet, T-Mobile Netherlands and Ahlstrom-Munksjö, the “Available Amount” builds from any “permitted indebtedness” without the “net proceeds” language preceding it. Arguably, any of the three interpretations could be read into this language. At the very least, this looser drafting injects more ambiguity into what is already a head-scratching provision.

On the bright side, at least the Available RP Capacity Amount and Contribution Debt baskets are carved out of the Available Amount definition in all transactions thus far. Had the drafters not done so, this would have created an infinite loop of converting RP capacity into debt capacity and vice versa (or at least the ability to convert $1 in to $2 over and over).

Unfortunately, it is unlikely that the meaning of the Available Amount will be settled without having to go to court first. Until then, the flexibility offered by the Available Amount concept will remain untamed. The ambiguity further muddles the calculations of how much capacity an issuer has to make RPs, or PIs. The inclusion of permitted debt in the Available Amount concept blurs the lines between the covenants – is it really justifiable that if the company can incur (or has incurred) debt it should have carte blanche to distribute the proceeds?

Is the Available Amount always Available?

Leverage limitations (not really)

Another key question to consider is how protective the conditions are on the use of the Available Amount basket. It is deal dependent, but a simple answer would be “not very” in light of the staggering flexibility offered by the concept. Out of the seven deals so far, only three restrict the usage of the Available Amount basket to make RPs by a maximum ratio test. This includes Ahlstrom-Munksjö, whose Available Amount basket, subject to a certain preferred instrument being repaid, is only restrained by a fixed charge coverage test. In all deals, the Available Amount can be used to make PIs without meeting any ratio test. Therefore, companies have access to an unrestricted amount of RP and PI capacity meaning the component parts and the interpretation of “permitted debt” become more critical as they will determine the overall capacity.

Events of Default occurring? Go ahead, make a PI or RP

Protective conditions on the usage of RP and/or PI capacity have gradually deteriorated such that not having an “event of default” blocker may no longer be considered as “off-market”. More and more deals permit the usage of RP and/or PI capacity even if a default has occurred, as long as that default does not yet matured into an “Event of Default”. The usage of the Available Amount for RPs in Arxada, Birkenstock, Ahlstrom-Munksjö and Arcaplanet, is subject to just no event of default occurring and continuing. A further deterioration can be witnessed in Modulaire Group and Ceramtec with the usage only blocked by a material event of default, i.e., non-payment or insolvency. In the case of T-Mobile Netherlands, no default blocker is present whatsoever.

Why does this all matter?

To recap, the Available Amount offers an immeasurable amount of flexibility no matter what “permitted debt” interpretation is chosen, and it lacks meaningful protective conditions. Covenants have gradually been loosening but it is fair to say that the inclusion of the Available Amount concept takes “loose” to a whole new level. So what are the implications for bondholders?

In theory, a company could be highly levered yet still able to leak value from the restricted group to unrestricted subsidiaries (via PIs) or pay dividends (via RPs) using the Available Amount.

Without the presence of this concept, the company would be limited to the more traditional RP baskets with the unlimited RP leverage basket unlikely to be available in situations of increasing or high leverage. However, using the Available Amount to make RPs allows the issuer to escape the leverage restraints, and in some cases, to repay subordinated debt in greater amounts than under the typical RP route.

Although it would likely cause investor outrage, a company whose back is against the wall might well use every tool at its disposal. As previously mentioned, commercial factors are likely to be the greatest limit, in particular with the “funded with” interpretation, but under the “reallocation” interpretation the debt does not have to be incurred in order to access the RP capacity. Therefore, therefore any debt incurred prior to a stressed scenario would have built the Available Amount, which then could be used on a rainy day.

Case Study - Birkenstock

In order to tie all of this together, we thought it would be helpful to work through a case study, using language that is already in the market — namely in the Birkenstock deal, issued in April 2021.

Under clause (xvii) of the RP covenant, Birkenstock can make uncapped RPs up to 6.0x leverage, and then further uncapped RPs provided they are 50% or 100% funded from the Available Amount, where total net leverage is greater than 6.0x, and 6.75x, respectively. Additionally, under clause (ff)(ii) of the PI covenant, Birkenstock can make uncapped PIs without being subject to a maximum leverage test, if funded from the Available Amount. Birkenstock had day one incremental debt capacity of 4.97x EBITDA (excluding the Term Loan Bs) and day one combined RP and PI capacity of 2.17x EBITDA. The company’s “Available Amount” definition includes “permitted debt”. Therefore, even without considering all the other components that build the Available Amount, this provides Birkenstock at least 7.14x EBITDA of RP and/or PI capacity on day one. However, in covenant-land, what goes up does not necessarily go down. The offering included a “super grower” — i.e., any basket that includes a "grower" component is permanently increased if EBITDA increases. As a result, the Available Amount capacity could potentially be even larger than the 7.14x EBITDA at issuance.

Utilising PIs in the ordinary way, Birkenstock could move assets outside of the restricted group by designating an entity as an unrestricted subsidiary using PI capacity funded from the Available Amount. Additionally, the indenture includes unrestricted subsidiary value transfer language. This clause enables Birkenstock to move assets to unrestricted subsidiaries: (1) ahead of a subsequent spin-off to shareholders (the conversion of investment capacity into dividend capacity), and/or (2) to facilitate the incurrence of structurally senior “priming” debt. Both structures are subject to having investment capacity, but Birkenstock can fund such manoeuvres from the Available Amount. This scenario becomes more critical under the “build-up” and “reallocation” interpretations. Fortunately in this case Birkenstock features a “J-Crew blocker”, meaning it cannot transfer material intellectual property (as defined in the SFA) to an unrestricted subsidiary, but this doesn’t block the company from transferring other types of assets.

If you need to quickly review the Available Amount concept on a particular transaction, what should you look out for? The following is intended to be a short list to help you focus your review on the key points.

1. How is the Available Amount defined?
   
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2. Can the issuer fund RPs from the Available Amount?
   
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3. Can the issuer fund PIs from the Available Amount?
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4. Is the usage of the Available Amount subject to a default or event of default blocker?

This analysis was completed using 9fin's powerful search and filter functionality across our library of OMs. Detailed searches can now be performed not just within a document but within the Description of Notes. For more information on this, please click here.