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In November 2023 EG Group came to market to refinance a significant amount of outstanding debt. This followed the sale of its UK and Ireland business to Asda (see our analysis here). As part of this complete refinancing, the company had to agree to prohibit any distributions or dividends to the shareholders. 

Let that sink in — TDR Capital and the Issa brothers cannot receive dividends or distributions from EG Group so long as the debt remains outstanding (bonds mature in 2028, see full Cap Table here), no matter how good performance is. This is a pretty big deal, let’s unpack it.

In order for EG Group’s refinancing to clear the market, they had to make a significant number of concessions in their covenants. We updated our Bond Legal QuickTake for all of the material changes to the covenants, you can see our revised analysis here. EG Group had the most changes of any deal since at least the beginning of 2021 (888’s 2022 deal might give it a good run for it’s money though).

In this piece, we want to focus on one big change — the dividend blocker. Below is the new language found in the final paragraph of the Restricted Payments covenant (trimmed for brevity, and with emphasis added) — you can also view the language on 9fin’s Covenant Explorer here:

“Notwithstanding anything else set forth in this covenant or in the definition of “Permitted Investments”, (1) [J.Crew blocker]; (2) neither the Parent nor any Restricted Subsidiary will, directly or indirectly, effect any distribution, dividend or other payment (including by way of stock redemption, loan, guarantee or other advances) to any direct or indirect shareholder of the Parent, including holders of Preferred Stock of Optima Bidco (Jersey) Limited and, in each case, their Affiliates and Related Persons (for the avoidance of doubt, other than the Parent and its Subsidiaries); and (3) [investments blocker].”

In plain English, notwithstanding the fact that they have an otherwise typical restricted payments covenant, EG Group’s “Parent” entity cannot make a direct or indirect distribution, dividend or payment to its shareholders. Note this includes to any holding company sitting above the Parent, as well as any of their affiliates or related persons.

Running the language through 9fin’s document search tools (see here) shows that this language is truly bespoke. Deals that have some shared roots are Iceland (February 2021 and July 2023), Asda (February and November 2021), and Lutech (May 2021). These are all linked together by shared ownership or law firms working on the deal, except Lutech. Each of those deals each feature simple J.Crew blockers exclusively focused on Material IP, but none of these deals have language that comes close to what is in EG Group. This looks like truly bespoke drafting.

The inclusion of a dividend blocker in the main syndicated financing of a group is very unique — so why would EG Group do this? Not to be facetious, but probably because they had to. Of course, without commentary from the company or its advisors, it will be hard to know exactly what happened. But we can surmise quite a bit. Clearly investors had acute concerns about value leakage to the shareholders — it has happened in the past, e.g., for jets. It wasn’t enough to simply lower the capacity of the company to make restricted payments — usually, when issuers face resistance they just tighten their ratio based capacity or baskets a little.

But, even more to the point, the very capital structure of EG Group is unique. Part of the refinancing included the addition of a floating rate PIK note — per the bond offering memorandum, the PIK was issued by the bond issuer, and has the same guarantees and security as the other bonds and loans. This is uncommon, typically PIK notes are issued at a holding company above the main financing entity, and would not share in the collateral or get any meaningful guarantees.

The odd inclusion of the dividend blocker might simply stem from the PIK notes sitting at the same level as the other financing. A dividend blocker is rather common in holdco / PIK debt where the lender is, in effect, taking equity risk. In a structure where the PIK is structurally subordinated, taking that equity-like risk, and doesn’t share in the collateral / guarantees, it should have some additional protections given it’s so remote from the assets. Once the structure is collapsed, why would the existing senior secured noteholders and lenders accept higher leverage and dilution of their collateral or guarantees without some heightened protection? 

But, on the other hand, why didn’t the PIK give up their protections by virtue of the fact that they got additional guarantees and security? We may never know the answers, but we think the questions are interesting.

One assumes TDR Capital and the Issa Family would like to extract some value eventually (there is after all a fulsome RP covenant with all the customary permissions which surely remain for some reason). Furthermore, a lot of ink was spilt amending the Restricted Payments covenant (as well as others) after marketing feedback. Why make all of those changes if the goal is just to completely turn off the tap? Does the covenant package allow any leakage?

These are difficult questions, lawyers will always find fun and unique ways of reading documents. But in this case, they really did include tight language. Nonetheless a few bits of leakage are permitted.

First, the blocker doesn’t prevent the repayment of subordinated indebtedness. The capital structure has second lien debt (which they appear to be treating as subordinated indebtedness), and it’s likely that it can be repaid using restricted payments capacity (and we think the market expects this outcome). Therefore, this probably isn’t the most interesting concern.

Second, the provision doesn’t block the making of investments using restricted payments, permitted payments or permitted investments capacity. However, there is a unique limit on this, which was included as prong (3) of the same paragraph that has the dividend blocker.

It says (trimmed for brevity, and with emphasis added): 

“Notwithstanding anything else set forth in this covenant or in the definition of “Permitted Investments”, (1) [J.Crew blocker] ; (2) [dividend blocker]; and (3) neither the Parent nor any Restricted Subsidiary will, directly or indirectly, make Investments in Unrestricted Subsidiaries, by way of a Restricted Payment, Permitted Payment or a Permitted Investment (including via designation as an Unrestricted Subsidiary), in an aggregate amount of more than €150.0 million at any time outstanding; provided that such Investments will not, directly or indirectly, be used to effect a distribution, dividend or other payment (including by way of stock redemption, loan, guarantee or other advances) to any direct or indirect shareholder of the Parent, including holders of Preferred Stock, of Optima Bidco (Jersey) Limited and in each case, their Affiliates and Related Persons (for the avoidance of doubt, other than the Parent and its Subsidiaries).”

So, whilst there is a Permitted Investments concept built in to the documents, this bespoke cap on their usage is pretty tight, furthermore, it explicitly says that it can’t be used as a run around of the dividend blocker. 

The final potential avenue of leakage is simply minority investments, which wouldn’t be captured by the paragraph above (by virtue of being minority, they aren’t Unrestricted Subsidiaries). However, those would be limited by their commercial value, and we view them as quite difficult to abuse. All in all, the blockers are quite tight!

We would love to hear what you think, feel free to email us if you want to share your thoughts.

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