Intertape’s recent bond offering of $400m 10% Senior Unsecured Notes 2028 attracted a level of pushback on bond document terms not seen for some time. There were around 30 changes - including to all of the key covenants (debt, restricted payments, asset sales). This was followed by 888 which continued the pushback trend with over 20 document changes to its €400m 7.558% Senior Secured Fixed Rate Notes 2027 and €300m 5.5% Senior Secured Floating Rate Notes 2028.

Both Intertape and 888 provide useful pushback precedents in the current market in light of the lack of primary deals. European investors may want to take note given the convergence of covenant terms across loan and bond markets in Europe and the US.

Usual Basket Size Reductions

A number of the changes in both Intertape and 888 were of the type commonly seen, namely reductions in basket size amounts and ratio levels. It’s unsurprising that a number of baskets were reduced given the large amounts initially proposed.

Intertape

• Reduction in the EBITDA limb of certain grower baskets under the debt and restricted payments covenants e.g. debt freebie basket reduced to 75% EBITDA and general debt basket reduced from 100% EBITDA to 50% EBITDA (still quite large).
  
• Reduction in ratio-based debt and restricted payments baskets, and addition of a leverage ratio test for use of the general restricted payments basket.
  
• Reduction in the 30% EBITDA cap (to 25%) on cost savings and synergies, and removal of the separate 25% EBITDA cap for add backs relating to new contracts. There was also a reduction in the look-forward period for EBITDA adjustments for cost savings from 24 to 18 months.

888

• Reduction in the debt freebie basket from 100% of EBITDA to 75% EBITDA.
  
• Reduction in the ratio level for senior secured debt from 4x to 3.5x Senior Secured Net Leverage Ratio.
  
• Unusually, there was an increase in the general debt basket from 35% to 40% EBITDA, though this may have been because the non-ordinary course debt basket of 25% EBITDA was deleted.
  
• The general investments basket was reduced from 40% to 30% EBITDA, and the JV investments basket was reduced from 35% to 20% EBITDA.

Market Driven Changes

888

• The carve-out from the definition of Indebtedness (relevant for ratio calculations) for amounts used to fund OID was deleted.
  
• The ability to optionally redeem up to 10% of the Senior Secured Fixed Rate Notes at 103% during the non-call period was deleted. This flexibility is seen in many fixed rate bonds in the last few years.
  
• Reporting was tightened to include a conference call for noteholders on a half-yearly basis.

Reclassification and Calculations

Most notable were changes to flexible terms that have gained popularity over the last couple of years and been the subject of limited pushback. These include changes to broad calculation flexibilities and to concepts that blur the distinction between the various covenants (debt, liens, restricted payments).

Intertape

The Available RP Capacity Amount concept (ability to sacrifice restricted payment capacity for debt capacity) was deleted entirely. Contribution debt (ability to incur debt on a $1 for $1 basis with new equity contributed to the Restricted Group) was reduced from 200% to 100%.

Investors pushed back on broad reclassification rights: the ability to reclassify general restricted payments and repayment of subordinated debt baskets to general investments, restricted payment capacity to permitted lien capacity, and the general debt basket to the incremental freebie basket.

The ability to exclude debt for working capital purposes from ratio calculations was deleted. Even the $ fixed amount limb of various grower baskets was tightened to remove any headroom due to rounding up.

888

Like Intertape, the ability to exclude working capital debt and other revolving debt from ratio calculations was removed in 888, as was the ability to exclude existing target debt from ratio calculations.

The broad definition of “Applicable Reporting Date” was tightened to remove the limb that gives the issuer added flexibility to calculate ratios, baskets and metrics by reference to the last day of the most recently completed relevant period for which the Group has sufficient available information (rather than the most recent annual or quarterly statements).

Carryback rights were also removed.

Leakage Concerns

In both Intertape and 888, there were a number of changes to limit leakage out of the Group.

Intertape

• Inclusion of a material IP blocker (as relates to Unrestricted Subsidiaries) in the asset sales and restricted payment covenant; a reduction of the cap for investments in non-guarantors; and splitting the joint basket for investment in JV/Unrestricted Subsidiaries. Investors were clearly concerned the entirety of the basket could be used for investments in Unrestricted Subsidiaries.
  
• The Asset Sales covenant commonly carves out asset sales, the proceeds of which are used to fund permitted restricted payments or investments for purposes of the asset sale proceeds application menu (but not from any eventual requirement to make an asset sale offer for the notes). This was deleted following pushback; investors were clearly not happy with this flexibility which has been included in nearly every bond and HY-style loan recently.

888

• The acquisition debt permission was amended to delete the ability to finance Investments. ‘Investments’ is usually defined broadly in a high yield bond and can permit leakage to shareholders.
  
• The carve-out from the restricted payments covenant allowing servicing of (uncapped) interest payments on parent debt was deleted.
  
• The ability to finance restricted payments from asset sales proceeds was deleted. If retained, the issuer could sell assets and use the entire proceeds to fund restricted payments (subject to capacity) rather than repay debt or reinvest. Unlike the usual language initially included in Intertape (set out above), there was no requirement to repay debt/re-invest the proceeds after 365-days.
  
• Deletion of the leverage-based step down relating to Excess Proceeds, meaning 100% of Excess Proceeds must be used to make an asset sale offer.

Other Changes

888

• As sometimes seen in high yield bonds, the notes guarantees’ can be released if the relevant guarantors are released under the credit agreement. In 888, additional wording was included to limit the circumstances under which bondholders could be dragged by releases under the credit agreement: any automatic release due to a guarantor ceasing to be a wholly-owned only applies if a guarantor ceases to be a wholly-owned subsidiary as a result of a bona fide sale of equity interests to a non-affiliated third party. Perhaps this change was made with a name like PetSmart, Inc in mind: an automatic release mechanism enabled PetSmart to transfer equity from its wholly owned subsidiary Chewy to its parent holding company and to an unrestricted subsidiary.
  
• The change of control provisions were amended to remove the public company exception. This carve-out would have allowed the issuer to avoid a change of control if acquired by another company provided no person owned more than 50% of the acquirer. Such a carve out enabled listed entity, London Stock Exchange Group (LSEG), to acquire Refinitiv from Blackstone and Thomson Reuters without triggering a change of control.

What Next?

The number and variety of the changes challenge the idea that pushback has to be limited to a small number of points and that throwing every flexible feature into marketing documents will result in at least some of those features remaining.

Our updated Legal QuickTake on Intertape Polymer Group’s $400m SUNs 2028 is available for clients here. The Summary of Revisions versus the Preliminary Offering Memorandum is here (also for clients).

Clients can see our Legal QuickTake on 888’s €400m 7.558% Senior Secured Fixed Rate Notes 2027 and €300m 5.5% Senior Secured Floating Rate Notes 2028 here. The Pricing Supplement detailing changes made to the Preliminary Offering Memorandum is here for clients.

If you have any questions on this analysis, please feel free to reach out to our legals team at legals@9fin.com.

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