High yield junk or joy DACT Treasury Beurs

High yield: junk or joy? DACT Treasury Beurs 11 November 2011

High yield: junk or joy? European high yield – a source of liquidity and refinancing opportunities for Dutch corporations High yield: junk or joy? Clifford Chance 2

High yield: junk or joy? Introduction Gregory Crookes High yield: junk or joy? Clifford Chance 3

High yield: junk or joy? Introduction Gregory Crookes Clifford Chance Amsterdam Partner – Corporate M&A and private equity Finding liquidity Jelle Hofland Clifford Chance Amsterdam Partner – Banking & finance and restructuring and insolvency The high yield market Michael Dakin Clifford Chance London Partner – High yield and capital markets Offering securities: high on regulation? Tineke Kothe Clifford Chance Amsterdam Senior Counsel – Banking and securities law and capital markets High yield versus bank loans – discussion Gregory Crookes (moderator), Michael Dakin, Jelle Hofland Tineke Kothe High yield: junk or joy? Clifford Chance 4

High yield: junk or joy? Finding liquidity Jelle Hofland High yield: junk or joy? Clifford Chance 5

Current financial markets – traditional bank loans § Traditionally, the Dutch corporates generally finance themselves with traditional bank loans in a variety of forms: § § Bilateral facilities versus club deals versus syndicated loans Term loans and revolvers Guarantee facilities Committed versus uncommitted versus until further notice. § With pressure on liquidity and the unstable economy, banks appear to have become more picky and critical as to the level of debt they are willing to provide and generally require more credit protection (in respect of the borrower group and versus other financiers). § The investment grade and other “high quality” borrowers (from a credit perspective and/or from side business opportunities) will generally still not have much problems to continue tapping the bank markets as they did before, although there may be some tightening of freedom. § Other types of borrowers (because of sector issues, individual problems or other reasons) encounter more problems to refinance at same levels or similar terms. § They may also have more trouble to generate appetite to provide event driven financing at all or on short notice (eg to do strategic acquisitions). High yield: junk or joy? Clifford Chance 6

Current financial markets – alternative sources § Bank facilities will remain required as they provide for the largest range of products and flexibility in financing options, but borrowers are wise to investigate other pockets of liquidity. § Certain borrowers have always looked at these alternative sources to provide a level of liquidity (such as securitisations, factoring, high yield, sale and leaseback structures and private placements). Also, supply chain finance (with or without backing by a bank) can ensure a diversification of financing sources. § A lot of corporates however dislike the idea of managing different debt layers (and entering into complicated intercreditor arrangements), incurring the related costs and entertaining the perceived never ending need of alternative financiers for more strict or specific information requirements, administration systems and credit protection. § There is some merit in these contra arguments, but part of it is also because “unknown makes unloved”. Once you get to know these products, the advantages can be multiple and most of these can work perfectly together with the traditional bank loans. § Also, going through these processes can create a huge learning curve for an organisation and individuals involved, and create more efficiency and risk awareness. High yield: junk or joy? Clifford Chance 7

Current financial markets – high yield bond alternative § In this workshop, we would like to focus on one of the alternative sources to bank funding: (not surprisingly given the title) high yield bonds. § High yield bonds are not necessarily the product for everyone, but it may be a real opportunity for more borrowers than you would expect. High yield: junk or joy? Clifford Chance 8

High yield: junk or joy? The high yield market Michael Dakin High yield: junk or joy? Clifford Chance 9

The European bank and high yield market High yield: junk or joy? Clifford Chance

The refinancing wall High yield: junk or joy? Clifford Chance

The refinancing wall High yield: junk or joy? Clifford Chance

Fallen Angels and cross over credits § Fallen Angels account for about 30% of total debt maturities of rated EMEA speculativegrade corporate. § Fallen Angels now account for the largest portion of annual refinancing needs in every year until 2015. § Of the 34 biggest issuers in the speculative-grade universe, 13 of which are Fallen Angels. § The outstanding debt of the Fallen Angels amongst the largest issuers continues to represent around 20% of total debt for rated speculative-grade corporates. § The Netherlands has upwards of € 7. 25 billion bank/bond maturities between 2012 to 2015. § The Netherlands represents 4% of EMEA maturities between 2012 to 2015. Clifford Chance 13

Key features of high yield bonds § Traditionally two tiers of contractual ranking: § Senior = has not agreed to be subordinated to other indebtedness in right of payment (but may be effectively subordinated to secured debt) § Senior subordinated = has agreed to be subordinated to some financial indebtedness, but not other obligations, such as trade payables. § Many European deals traditionally feature structural subordination (eg the issuer of the notes is the parent of the borrower of the bank debt). § Europe is increasingly seeing secured high yield note issuances. § Primary governing document = trust indenture/trust deed. § Passive relationship with noteholders via trustee means less intrusion into company affairs, but also makes it difficult to cost-effectively modify terms. § No financial maintenance covenants - just a test at the time certain events occur (eg debt incurrence or when restricted payments (like dividends) are being made). High yield: junk or joy? Clifford Chance 14

Key features of high yield bonds (continued) § Change of control requires a repurchase offer (usually at 101%). § Usually not prepayable (“non-callable”) for a few years, then with a premium § Make whole premiums may be used to shorten non-call period § Fixed rate notes typically are non-callable for half their tenor and thereafter callable at fixed redemption premiums § Floating rate notes allow redemption sooner and at lower premium § IPO call of up to 35% of bonds at par plus coupon (“equity clawback”). § Bonds are a security, so securities law concerns come into play § US private placement issues/10 b-5 liability § Listing issues. High yield: junk or joy? Clifford Chance 15

The pros and cons of high yield bonds § Attractive features of high yield bonds include: § Incurrence only covenants § Long tenors (7 to 10 years) § Bullet payments § Ability to incur more leverage § Lower sensitivity to uses of proceeds (eg acquisitions, etc) § Potential to do unsecured deals § Ease of raising additional debt (eg tap issuances) § Liability management transactions (eg open market purchases, tenders, etc). High yield: junk or joy? Clifford Chance 16

The pros and cons of high yield bonds (continued) § Less appealing features of high yield bonds include: § Disclosure and due diligence § The cost of disclosure and due diligence (but, it is a long term investment – see above regarding ability to do tap deals, etc) § Availability of financial statements § Timing § Difficulty in amending terms § Limited redeemability/callability. High yield: junk or joy? Clifford Chance 17

Key milestones for typical high yield transactions Corporate refinancings Engagement/ Engagement Letter (? ) Structuring Kick-off Meeting Prospectus Drafting and Due Diligence Negotiation of Description of Notes Launch Transaction Pricing Closing The high yield process is often run in parallel with a refinancing of an existing credit agreement and certain aspects of the two processes can be run simultaneously for purposes of efficiency. * NB: the Rating Agency process has been omitted from the above, but is an essential part of the underwriter’s role in a high yield issuance and typically runs simultaneously with the prospectus drafting and due diligence. High yield: junk or joy? Clifford Chance 18

Sample due diligence and drafting timetable § Typical offering process for a new issuer would take 8 to 12 weeks § Kick off meeting T § Commence drafting of OM “wrap” T+1 § Due diligence request list agreed T+7 § Management due diligence meeting T+14 § Commence drafting of Business/Risk Factors/MD&A T+15 § Data room open T+21 § First draft of OM circulated T+28 § Documentary due diligence completion T+28 § First drafting session on OM T+30 § Second draft of OM circulated T+35 High yield: junk or joy? Clifford Chance 19

Sample due diligence and drafting timetable (continued) § Second drafting session T+37 § Third draft of OM circulated T+42 § Third drafting session T+44 § Fourth draft of OM circulated and sent to printer T+49 § Drafting sessions at printer T 51 -54 § Bring down diligence conference call T+55 § Launch roadshow T+55 § Print preliminary OM T+55 § Drafting and negotiation of the Description of the Notes to occur throughout the process § Ratings agency process to also run simultaneously and to be managed by banks High yield: junk or joy? Clifford Chance 20

Major differences between high yield and investment grade bonds Terms among various high yield, cross-over and investment grade bond deals vary significantly within each such asset class, the below chart illustrates the significant differences between generic standardised transactions of these types: Covenant / Event of Default Traditional High Yield HY w/Fall-Away / Suspension Cross-Over Credit Investment Grade Debt incurrence Yes No Varies No Restricted payments Yes No Varies No Liens / negative pledge Yes Yes Dividend blockers Yes No Varies No Merger, consolidation and sale of assets Yes Partial Varies Transaction with affiliates Yes No Varies No Designation of restricted /unrestricted subs Yes No Varies No Guarantees of other indebtedness Yes Yes No High yield: junk or joy? Clifford Chance 21

Major differences between high yield and investment grade bonds (continued) Covenant / Event of Default Traditional High Yield HY w/Fall. Away / Suspension Cross-Over Credit Investment Grade Yes No Varies No Change of control Offer @ 101 Varies Asset sale Offer @ Par No Varies No Non-payment Yes Yes Covenant default Yes Yes Cross acceleration Above threshold Judgment default Above threshold Bankruptcy Yes Yes Illegality / unenforceability / repudiation Yes Yes Sale and leasebacks High yield: junk or joy? Clifford Chance 22

Major differences between credit agreements and high yield bonds Senior Credit Facilities: § Term Loans § Revolving Credit Facilities High Yield Bonds: § Senior = has not agreed to be contractually subordinated to other indebtedness (but may be effectively subordinated to secured debt) § Senior subordinated = has agreed to be subordinated to some financial indebtedness, but not other obligations, such as trade payables Governing Doc Credit Agreement Trust Indenture Guarantees and Security Often (typically) secured by most or all of the assets of the borrower. Operating company notes usually have subsidiary guarantees. May be supported by: §Secured guarantees of the borrower’s subsidiaries, and/or §A guarantee by the borrower’s parent, if any (secured by a pledge of the borrower’s stock). Relationship with Debtors High yield: junk or joy? Holding company notes usually do not have subsidiary guarantees: §Discount notes, PIK notes, etc, are common at the Holdco level since Opco payments up for debt service will usually be restricted §May be partly or fully secured, on a first or second lien basis. Active relationship with agent and lender group means more intrusion into company affairs, but also offers easiest method to modify the credit terms. Passive relationship with noteholders via trustee means less intrusion into company affairs, but also makes it difficult to cost effectively modify terms. Private communications possible, even for public reporting borrowers. Communications are assumed to have the potential to become public. Clifford Chance 23

Major differences between credit agreements and high yield bonds (continued) Senior Credit Facilities: High Yield Bonds: Covenants Almost always include financial maintenance covenants. Almost always involve an incurrence test at the time certain events occur (eg debt incurrence or when restricted payments (like dividends) are being made). Ability to prepay Prepayable at any time, usually with no premium. Usually not pre-payable (“non-callable”) for a few years, then with a premium: §Make whole premiums may be used for shorter non-call period §Generally a tender offer equal to the cash flows to the first call discount at the sovereign rate plus 50 basis points will be successful §Floating rate notes allow redemption sooner and at lower premium. Change of control usually gives rise to an immediate obligation to make a mandatory prepayment in full. Change of control requires a repurchase offer (usually at 101%). Other distinguishing features Representations and warranties repeated with each borrowing. Bonds are a security, so securities law concerns come into play: § US private placement issues / 10 b-5 liability § Other securities laws and listing issues. High yield: junk or joy? Clifford Chance 24

High yield: junk or joy? Offering securities: high on regulation? Tineke Kothe High yield: junk or joy? Clifford Chance 25

Bank lending versus capital markets § Higher capital requirements for banks under Basel III will result in less lending by banks, forcing borrowers to look beyond bank financing to capital markets. § The capital markets are generally more regulated than bank lending transactions. § Issuers have disclosure obligations at time of issuance (prospectus), in particular when offering securities to retail investors or listing securities on regulated markets… § … and issuers also have ongoing reporting obligations under transparency and market abuse rules. § However, many exemptions are available in the EU for disclosure and reporting obligations, for example, when offering highly denominated securities or when restricting the offers to qualified investors. High yield: junk or joy? Clifford Chance 26

Bank lending versus capital markets (continued) § Depending on the investor base US and other securities regulations may apply. § Documentation includes prospectus / offering memorandum, subscription / purchase agreement, agency agreement and trust deed / trust indenture… § … and generally more parties are involved than in bank lending transactions (paying agents, trustee, regulators, stock exchanges, rating agencies and auditors). § Amendments to terms and conditions of the securities may require holders’ consent. High yield: junk or joy? Clifford Chance 27

Circular 230 Legend This presentation is not intended or written to be used, and cannot be used by any person, for the purpose of avoiding US federal tax penalties, or promoting, marketing or recommending to another party any transaction or matter addressed herein. Each recipient of this presentation that is not a client of Clifford Chance US LLP with respect to the matters discussed herein should seek advice based on such recipient’s particular circumstances from an independent tax adviser. High yield: junk or joy? Clifford Chance 28

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