1. Not-so-Non-Callable

Call schedule allows for redemption at par plus a percentage of the coupon that step-downs each year after the initial non-callable period.

First, let’s take a look at tenors. 7-year deals were the most common (23% of all deals) from 2011 to 2015 , since then, it’s been shorter five-year deals (26% of all deals from 2016). Even on their own, the slashed tenors contribute to a need for more frequent refinancing and shorter-termed maturity structures.

Focusing on the main tenors, 8, 7 and 5 years, a similar pattern has occurred with decreasing Non-Call (NC) lengths. Typical 8NC4, 7NC4 and 5NC3 have slowly waned as 8NC3, 7NC3 and 5NC2 became the go-to. Coinciding with shortening tenors the once-rare 5NC2 has seen a substantial increase in acceptance, becoming the most likely call schedule featured in present day deals.

A case in point, AEDAS Homes debuted with €315m 5NC2 SSNs originally advertised. Investor demand not only saw an upsize of €10m and pricing at the tight-end of talk, but also a decrease in the non-call period to 1.5 years. As highlighted in the LevFin Wrap, 5NC1.5 schedules have a habit of signalling the top of the market.

Now, redemption prices.

As expected, premiums mirror the trend seen by tenors, allowing for cheaper redemption earlier on in a notes lifetime. From 2009-2015 to 2016-2021 decreasing premiums can be seen across the board, with a ~20% pts increase in the number of notes available for redemption at par, two years after the non-callable period. At the same time, decreases can be seen in the more expensive first year premium of 75% and second year premium of 50%.

2. 40 is the new 35

On or prior to *date*, the Issuer may redeem up to x% of the original principal amount of the notes with the net cash proceeds from specified equity offerings at a redemption price equal to x% of the principal amount.

The volume of high yield deals that feature an equity claw option has seen a rise from 63.4% in 2010 to 83.6% in 2021. The more significant increase is seen in the last few years with growth of 12% pts from 2018 to 2021.

Equity claws have been trending upward in unsecured offerings. E.g. Jaguar Land Rover, who issued SUNs throughout 2015 to 2019 without this option, but since late 2020 have included the term.

Similarly, the percentage of principal allowed for redemption has arguably seen the most glaring change. Apart from the odd edge case, (e.g. Loxam at 45%) the common equity claw percentages are either 35% or 40%. The extra 5% has gone from a rarity at the beginning of the last decade, to featuring in more than 90% of clawed deals.

In addition, what counts as an "Equity Offering" for purposes of the equity claw may be broader than bondholders may realise. Often a private equity sale or even sponsor-funded new equity could permit use of the claw.

Historically a certain percentage of notes had to remain outstanding (typically 100% less max claw amount) after using an equity claw. This meant that if an issuer desired to redeem all notes during the NC period then investors would be entitled to the full make-whole. However, drafting has evolved in recent years to decrease the percentage of notes required to remain outstanding (to 100% less max claw amount less 10%, i.e., 50% rather than 60%) and in some deals, this requirement falls away completely if the remaining bonds will be redeemed “substantially concurrently”. This latter language, where present, allows the issuer to use the equity claw together with the make-whole redemption (a “blended make-whole”) to redeem all of the notes, achieving potentially significant savings vs a full make-whole redemption price.

3. Achieving 10% Returns

Prior to, *date* the Issuer may redeem during each 12-month period commencing with the Issue Date up to 10% of the originally issued aggregate principal amount of the Notes at a redemption price equal to 103%

First introduced by Expro in December 2009, this feature saw some tinkering early on. Some deals, such as CEVA’s SSN issued 2012 marketed deals with a redemption option for 10% at 105% in each 12-month period, but as the feature has aged it has become commonly known and seen as 10% at 103.

The popularity of this option has been slowly picking up over the last decade, with 28.3% of current 2021 tranches featuring the term.

Exclusively in secured tranches for the first few years, soon issuers floated the inclusion of unsecured tranches. At 4.8%, 2021 has seen the greatest percentage of unsecured’s with the term. Not particularly alarming, but if the above is anything to go by this ship is sailing in only one direction.

Unsecured tranches we have tracked that include 10% @ 103 option:

4. Taking Back Change of Control

Portability - usually leverage tested, an exception from the requirement to make a CoC offer to repurchase the bonds. Other, less used tests include rating-based

The change of control (CoC) put option mandates issuers offer to repurchase all outstanding notes after a CoC has occurred. Investors then have a choice between executing the option or not. Customarily the put price is 101, however 100 and 102 have been seen from the likes of Softbank and Nobina, respectively.

First seen in 2010, Ziggo had portability where a CoC was not triggered provided the Consolidated Leverage Ratio was less than: (a) 5.0 to 1.0 prior to the first year of the issue date; and (b) 4.5 to 1.0 thereafter. At the time of issuance pro forma net leverage was marketed as 5.49x, the company would have to de-lever to exercise the option.

Once an oddity, aggressive features often become the norm. The logical next move was setting the test back to opening leverage (or even above), eliminating the need to improve performance and de-lever. For example, in December 2020 IMA inspired this 9fin twitter thread. Marketed on pro forma net leverage ratio of 4.53x, portability was marketed at 5.25x, almost 0.75x above the opening leverage. In this case, investor pushback reduced this to opening leverage.

Levels are not alone, other portability aspects are subject to the same aggressiveness. Time limits have practically disappeared alongside leverage step-downs. Use of tighter gross ratios has eroded. Test date flexibility has heightened and allowance for multiple uses under the same documentation is no longer uncommon. All further contributing to lacking CoC protection.

The evolution of portability over the last decade accurately reflects the overall shift seen with redemption options. A term where the power was originally wielded by investors has been snatched away using an issuer-friendly, aggressive invention that, in more recent times, can render the put option useless and leave bondholders defenceless to a CoC.

Similarities can be drawn with all redemption options where investors have ultimately succumbed to issuer aggressiveness more often than not. Diminishing NC periods, cheapening redemption prices, additional equity optionality, emerging 103, and presumptuous portability levels.

Accompanied by daring covenants, the developments have created an environment where issuers enjoy greater control while investors live with growing uncertainty, not knowing when the next portion of their high coupon paying pie is going to be consumed.

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