High Yield 3rd Edition

7/21/2019 High Yield 3rd Edition

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Page

TRADITIONAL CREDIT FACILITY VS. HIGH YIELD BONDS 1

INTRODUCTION 2

THE HIGH YIELD COVENANT PACKAGE 13

INDICATIVE TRANSACTION TIMETABLE 26

GLOSSARY 29

If you have any questions about high yield bond offerings, please contact the author of this guide or any

of the other key members of our global high yield practice listed on the last page of this guide.

Bernd Bohr

Partner

[email protected]

201 Bishopsgate 1675 Broadway

London EC2M 3AF New York, NY 10019- 5820

United Kingdom United States

T +44 20 3130 3640 T +1 212 506 2299

F +44 20 3130 8760 F +1 212 262 1910

Contents



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TRADITIONAL CREDIT FACILITY VS. HIGH YIELD BONDS

Traditional Credit Facility High Yield Bonds

• Maintenance and incurrence covenants • Less onerous incurrence covenants only

• Typically term of 3 – 5 years • Typically terms of 5 – 10 years

• Interim payments generally required by

banks

• Bullet maturity

• Generally repayable at any time • Non-call period generally 3 to 5 years and

thereafter decreasing prepayment / call

premium

- typical call features: 5nc2, 7nc3, 8nc4,

10nc5

• Amendments relatively common and

uncomplicated

• Amendments require consent

solicitation from investors, which can be

costly and time-consuming

• Documentation relatively

straightforward

• Documentation requires more time and

expenses

• Senior and typically secured and

guaranteed

• Potentially more flexibility; senior or

subordinated and frequently unsecured

with only negative pledge

• Floating Rate • Fixed or Floating Rate

• Private reporting (monthly or quarterly ) • Public reporting (quarterly)

• Minimal public market awareness • Creates awareness in public capitalmarkets and benchmark that can

facilitate further fund raisings, including

possible IPO

• Rating not necessarily required • Rating required (typically by Moody’s

and S&P)

• Investors are banks, institutional funds • Investors are mutual funds, hedge funds,

insurance companies, pension funds,

private wealth management accounts

• Potential prospectus liability



2 High Yield Bonds - An Issuer’s Guide

INTRODUCTION

WHY HIGH YIELD?

Traditional reasons for high-yield offerings include:

y established companies that do not carry (or have lost) an investment grade rating (i.e. rated Ba 1/

BB+ and below by Moody’s and S&P, respectively);

y private companies looking to reorganize their capital structure; and

y nancings for leveraged buy-outs.

Mutual benefits for issuers and investors include:

y issuers benet from long-term debt nancing with covenants that are typically less onerous than

the standard covenants included in a typical credit facility; and

y investors benet from higher interest rates with the added benet of capital appreciation.

THE IDEAL HIGH YIELD BOND CANDIDATE

Other than investors in investment grade debt that may primarily focus on an issuer’s credit profile /

metrics (e.g. leverage and credit ratings), high yield bond investors also focus on some of the same

factors in making their investment decision as equity investors, such as the issuer’s strategy and

growth prospects.

The ideal candidate for a high yield bond exhibits some or all of the following characteristics:

y a stable and resilient business model / nancial track record and/or growth/recovery story;

y market leading positions and favorable industry trends / growth prospects;

y an experienced management team with a proven track record;

y solid cash generation and future deleveraging potential;

y nancing needs of at least €150 million to €200 million and with limited bank nancing available;

and

y the proceeds prospects of the oering are to be used for renancing of existing indebtedness,

acquisition nancing or (dened) general corporate purposes.




Structural Subordination

In the most common form of structural subordination, the high yield bonds are issued by a (top-

level) holding company, whereas structurally senior debt is issued by a (lower-level) operating

company further down the group structure where the operations and assets of the group are

located. This senior debt will likely have restrictions on payments to the holding company from the

operating company, i.e. so-called “dividend stoppers”.

In this structure, the subordinated debt is “structurally” subordinated because the holders of the

HoldCo debt have no direct access to the assets or cash of OpCo. Instead, the only claim HoldCo

creditors have on assets of OpCo is through the shares of Opco held by Holdco. In a bankruptcy or

liquidation of OpCo, this (equity) claim would be junior (i.e. subordinated) to the claims of the

creditors of OpCo and its subsidiaries, including the claims of unsecured creditors, such as

subordinated debt holders or trade creditors. Stated differently, under applicable bankruptcy or

insolvency laws, OpCo would be required to repay all is creditor in full before it would be permittedto distribute any remaining liquidation proceeds to its shareholders (i.e. HoldCo), which could then

be used to satisfy obligations under the structurally subordinated debt issued by HoldCo.

Notes (StructurallySubordinated Debt)

HoldCo

OpCo

Sub Sub Sub Sub

StructurallySenior Debt

Divided Stoppers by Senior Debt



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Lien Subordination

To the extend the company’s capital structure includes secured debt, bank debt will normally be“first lien debt”, i.e. the bank debt (credit facility) will benefit from security interests (e.g. mortgages,

pledges, ….) over some or all of the assets of the company and its subsidiaries whereby the bank

creditors get paid in full before any other creditors receive any proceeds from the sales of such

assets in the case of a bankruptcy or insolvency.

High yield bonds may be either unsecured or secured and may be either first lien or second lien debt.

If the high yield bonds are first lien debt, they will share pari passu with bank debt in the proceeds

from the sale of any collateral. If they are second lien debt, they would receive proceeds from the sale

of collateral only after the first lien debt has been paid in full. In either case, the high yield bonds are

generally “silent”, meaning that bank creditors typically “call the shots” on enforcement remedies

with respect to the collateral. The specific rights and limitations between different groups of

secured creditors with respect to the collateral are typically spelled out in a so-called “Intercreditor

Agreement”.

KEY DOCUMENTS

A high yield bond offering typically involves the preparation of the following key documents.

Oering Memorandum

The offering memorandum is a disclosure document intended to provide potential investors with all

material information necessary to make an informed decision as to whether or not to invest in the

bonds. In addition to a description of the terms and conditions of the bonds (typically referred to asthe “Description of the Notes” or “DoN”), the offering memorandum will contain a description of

the risks associated with an investment in the bonds, a description of the company’s business

(including strengths and strategies of the company) and of the industry and markets in which the

company operates, a section entitled “Management’s Discussion and Analysis of Financial

Condition and Results of Operations” ( MD & A ), historical financial statement s, biogr aphies of

officers and directors, information about their compensation, information about any significant

pending or threatened litigation, a list of material properties, a description of material agreements

and any other material information. In addition to providing potential investors with information

about the proposed offering, the offering memorandum also serves to protect both the company

and the underwriting banks from liability under applicable securities laws for alleged material

misstatements or omissions in connection with the offer and sale of the bonds.

The term “offering memorandum (OM)” or “offering circular (OC)” is typically used in a high yield

bond offering instead of the term “ prospectus” to indicate that the bonds are being offered in a

(private) transaction that relies on certain exemptions under applicable securities laws from the

requirement to prepare a formal “prospectus” that has been reviewed and/or approved by the

relevant securities regulator, as would be required in many jurisdictions (including the United States

and the European Union) for a broadly marketed offering to the general public.




Indenture

In case the high yield bonds are governed by New York law, the issuer will be required to enter into a

bond indenture (the “Indenture”, also sometimes referred to as “trust indenture” or “deed of

trust”). The Indenture is the legal contract entered into among the issuer of the bonds (the “ Issuer”),

any guarantors of the bonds (the “Guarantors”) and a bond trustee (the “ Trustee”), as trustee for

the holders of the bonds from time to time. It contains the key terms of the bonds such as the

interest rate, maturity date, pledge, promises, representations, covenants, and other terms of the

bonds. The terms of the Indenture will be summarised in the offering memorandum in the

“Description of the Notes” section. In case the high yield bonds are governed by a law other than New

York law, the issuer will enter into a similar contract customary for bond offerings under the relevant

local law, for example, a so-called “Fiscal Agency Agreement” with a fiscal agent. However, the

substance of the relevant contractual provisions and key commercial terms will be substantially

similar.

Purchase Agreement

The purchase agreement (also frequently referred to as “ underwriting agreement” or

“subscription agreement”) is typically entered into very late in the offering process after the Issuer

and the investment banks involved in the offering (the “ Underwriters” or “Initial Purchasers”)

have completed the marketing of the bonds (i.e. the “road show”) and are prepared to “price” the

offering and fix the exact principal amount, interest rate, maturity, … of the bonds. In the purchase

agreement the Issuer agrees to issue and sell the bonds to the Underwriters and the Underwriters,

subject to certain conditions, agree to purchase the bonds from the Issuer at an agreed price at

closing (typically 3-5 business days after the signing of the purchase agreement). In addition, theIssuer makes numerous representations and warranties, including with regard to its business and the

completeness and accuracy of the offering memorandum, and agrees to indemnify the

Underwriters for any losses as a result of a breach of the representations and warranties, most

importantly any losses as a result of any material misstatements or omissions in the offering

memorandum.

Upon execution of the purchase agreement, the Underwriters take on the risk of distributing the

bonds to investors, i.e. “underwrite” the offering. Should they not be able to find enough investors

that agree to purchase the bonds, notwithstanding the (positive) feedback from investors during

the marketing process, they will have to hold some of the bonds themselves. The Underwriters earn

the fees for their services from the price difference (the “ underwriting spread” or “underwritingdiscount”) between the price they agree to pay the Issuer for the bonds in the purchase agreement

and the public offering price at which the bonds will be (on-)sold to investors.

Intercreditor Agreement

The Intercreditor Agreement is entered into between the main creditors of the Issuer to govern the

common terms and relationships among the creditors in respect of the Issuer’s obligations. Among

other things, the intercreditor agreement will contain provisions that limit the ability of creditors to

vary their respective rights and address issues such as voting rights, notifications of defaults as well

as the order of applying the proceeds of any debt recovery efforts, including from the sale of

collateral. To the extent certain groups of creditors are subordinated to other groups of creditors,

the intercreditor agreement will set forth the terms of subordination and other principles to apply as

between the senior creditors and the subordinated creditors.



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Legal Opinions and Disclosure Letters

Under the U.S. securities laws, the Underwriters can avoid potential liability to investors in the bondsfor material misstatements or omissions in connection with the offering process if they can

demonstrate that they have conducted a reasonable investigation into the affairs of the Issuer

before selling the bonds (so-called “due diligence defence”). To support this due diligence defence,

the Underwriters, their lawyers and the lawyers of the Issuer in a Rule 144A offering will therefore

conduct a thorough review of the affairs of the Issuer, including by reviewing certain legal

documents as well as financial and business information of the Issuer and by attending due diligence

meetings with the management of the Issuer and the Issuer’s auditors.

In addition, the lawyers of both the Underwriters and the Issuer will be required to provide certain

legal opinions, for example, with regard to due organization of the Issuer, due authorization of the

bonds, no violation of any laws or agreements by which the Issuer is bound and the availability of

relevant exemptions under applicable securities laws. In case the bonds will be marketed to investors

in the United States, both law firms will also be required to provide formal disclosure letters (also

called “negative assurance letters” or “Rule 10b-5 letters” after the relevant liability provision

under the U.S. securities laws) indicating that, in the course of their work on the offering and as a

result of their own investigations, nothing came to their attention to cause them to believe that the

offering memorandum was materially incomplete, inaccurate or misleading.

Comfort Letters

Comfort letters are typically provided by the Issuer’s auditors at or immediately prior to “pricing” (i.e.

signing of the purchase agreement) and are another key component of the due diligence defence of

the Underwriters. In the comfort letter, which will follow a standard format prescribed by the

relevant accounting body (e.g. Statement of Accounting Standards (SAS) 72 for U.S. comfort letters),

the auditors of the Issuer will typically reaffirm their independence and that they stand by their audit

opinion on the Issuer’s audited financial statements included in the offering memorandum, describe

any (review) procedures they have performed on any interim financial information included in the

offering memorandum or on any internal management accounts for any “ stub periods” between

the date of the latest audited or reviewed financial statements of the Issuer and the date of the

offering memorandum, describe any additional “ agreed upon procedures” they have conducted

with regard to the Issuer’s financial information included in the offering memorandum and provide

“negative assurance” as to the absence of material changes with regard to certain specified financial

line items since the date of the most recent financial statements included in the offeringmemorandum. At closing of the offering, the auditors will provide a so-called “ bring-down” comfort

letter to re-verify, as of the closing date, that the original comfort letter is still valid.

PARTIES

The following is just a brief overview of the various entities within the Issuer group that may be

involved in a high yield bond offering and of their respective roles within the bond structure.

The Issuer

For public companies, the Issuer will likely be the public company itself. For private companies, the

identity of the Issuer is less clear. Depending on what the overall capital structure of the companyand any existing (senior) bank debt will permit, the Issuer could either be the ultimate parent

(holding) company, an intermediate holding/operating company or a lower-level operating

company. See also “-Subordinated Debt-Structural Subordination” above.




The Guarantors

Frequently, high yield bonds will be guaranteed by most (if not all) Restricted Subsidiaries (as defined

below) of the Issuer (“up-stream guarantees”) and in many transactions, the Guarantors will also

provide asset security for the high yield bonds. This will give holders of the high yield bonds a direct

claim against the relevant guar antor subsidiaries and therefore brings the obligations under the bonds

closer to the physical assets of the Issuer group, overcoming some of the structural subordination

issues described on page 3. If the Issuer is an entity other than the ultimate parent company of the

group, there may also be a (“down-stream”) parent guarantee.

In some jurisdictions, guarantees by foreign subsidiaries can have negative tax consequences and it

is therefore necessary to consult tax specialists early in the structuring process. For example, foreign

subsidiaries of U.S. issuers usually do not act as Guarantors, because under U.S. tax rules a guarantee

by a foreign subsidiary of a U.S. parent company’s debt is deemed a dividend, subject to certain

exemptions.

As a general matter, the Issuer and Underwriters should consult local law experts as to any

requirements for and the validity of subsidiary-parent guarantees under applicable fraudulent

conveyance, insolvency or similar laws.

Restricted Subsidiaries vs. Unrestricted Subsidiaries

Issuer

ForeignRestricted Sub

RestrictedSub

RestrictedSub

UnrestrictedSub

For covenant compli-

ance, inter-company

transactions betweenentities within the

Controlled Group

and those outside the

Controlled Group are

more dicult than those

solely within the

Controlled Group

Income of

Unrestricted

Subsidiaries is

not included in

the calculation of

nancial ratios under

covenants

Pontential legal/ta xhurdles for being

a Guarantor

Subject to Covenants

Controlled Group

Not a GuarantorMay or may not be Guarantors



mayer brown 9

By default, all subsidiaries of the Issuer will be “restricted” in the sense that they are “in the system”,

unless they are specifically designated as “unrestricted”.

Being a “Restricted Subsidiary” means that:

y all income produced by the relevant subsidiary will count for purposes of compliance with

various covenants;

y the relevant subsidiary will be limited in its ability to take actions limited by the covenants; and

y the relevant subsidiary will be free to transact with other Restricted Subsidiaries.

“Unrestricted Subsidiaries”, on the other hand, are ring-fenced in the sense that they are “outside

the system” (i.e. outside the so-called “Controlled Group” 0r “Restricted Group”), which means

that:

y income produced by the relevant subsidiaries will not count for purposes of compliance with

various covenants;

y the relevant subsidiary will not be subject to the covenants and thus not subject to any

restrictions on their activities; and

y the relevant subsidiaries will not be free to transact with Restricted Subsidiaries.

Formation or designation of Unrestricted Subsidiaries may be useful, for example, if the Issuer plans a

geographic or business line expansion that it plans to fund separately. It is possible to designate a

subsidiary as unrestricted at a later date but the requirements for doing so are onerous. These

requirements and the consequences of such designation are described on pages 22 and 23.

CERTAIN SECURITIES LAW CONSIDERATIONS

The securities laws of many jurisdictions, in particular the United States, impose various restrictions

on publicity and the release of information generally in connection with proposed offerings of

securities. “Publicity ” for this purpose can be construed very broadly and may include any form of

communication, whether in written, oral or electronic form, that (i) relates to or concerns the

offering, (ii) relates to the performance, assets, liabilities, financial position, revenues, profits, losses,

trading record, prospects, valuation or market position of the Issuer, (iii) might affect an investor’s

assessment of the financial position and prospects of the Issuer, or (iv) otherwise has the purpose, or

reasonably could have the effect, of “conditioning the market” in a particular jurisdiction (i.e.

generating or promoting interest in the offering) or influencing or encouraging an investor’sinterest in the Issuer or the offering or a decision to purchase the securities in question. Failure to

observe these publicity restrictions may result in prospectus publication, registration or similar

requirements under the securities laws of various jurisdictions and adversely affect the offering,

including by way of delays related to a “cooling off period” that may be imposed after improper

publicity under the U.S. securities laws.

In addition, the release of information that is inaccurate, misleading or inconsistent with the offering

memorandum to be published in connection with an offering is undesirable, may cast doubt on the

accuracy of the offering memorandum and ultimately may result in liability for alleged material

misstatements or omissions in the offering memorandum. It is important that all information released in

connection with an offering should be verifiably accurate and consistent with the offering memorandum.

To ensure compliance with all applicable securities laws and regulations, the lawyers of the Issuer

typically prepare “publicity guidelines” at the outset of a proposed offering, which will be reviewed by




the lawyers of the Underwriters and must be observed by all offering participants. In order to avoid the

legal risks of uncontrolled communication with the public, it is often advisable to appoint one

representative of the Issuer to serve as the initial point of contact with the press and securities analysts,

and to serve publicity and other broad-based communications during the offering process in order to

ensure compliance with the restrictions set out in the publicity guidelines. All representatives of the

Issuer and other offering participants who are likely to be approached by, or come in contact with, the

press or securities analysts should each be f amiliar with the publicity guidelines and should ensure that

no publicity is undertaken or permitted e xcept in accordance with the publicity guidelines.

U.S. Securities Law Considerations

Section 5 of the U.S. Securities Act of 1933, as amended (the “ Securities Act”), prohibits any sales or

offers for sale of securities unless a registration statement (including a prospectus that meets

statutory requirements) has been filed with the U.S. Securities and Exchange Commission (“ SEC”) or

unless an exemption from such registration is available. Most securities offerings by European

issuers are conducted in reliance on one or more exemptions from the registration requirement

under Section 5 of the Securities Act. In particular, substantially all high yield bond offerings in

Europe are conducted as private placements to institutional investors in certain jurisdictions,

including (i) in the United States exclusively to so-called “qualified institutional buyers” or “QIBs”

in reliance on Rule 144A under the Securities Act (“Rule 144A”) and (ii) outside of the United States

in reliance on Regulation S under the Securities Act (“ Regulation S” or “Reg. S”).

Rule 901 of Reg. S contains a general statement of the applicability of the registration requirements

of the Securities Act. It clarifies that any offer, offer to sell, sale, or offer to buy that occurs “within the

United States” is subject to the registration requirements of Section 5 of the Securities Act while any

such offer or sale that occurs “outside the United States” is not subject to Section 5. The

determination as to whether a transaction occurs “outside the United States” will be based on the

facts and circumstances of each case.

Helpfully, Reg. S also contains a number of more specific “safe harbor” provisions, including most

notably the safe harbor provided by Rule 903 of Reg. S whereby an offer or sale of a security is

deemed to occur “outside the United States” if (i) the offer or sale are made in “ offshore

transactions ” and (ii) no “directed selling efforts” are made in the United States by the Issuer, the

Underwriters, any other distributor, any of their respective affiliates, or any person acting on their

behalf. “Directed selling efforts” means any activity undertaken for the purpose of, or that could

reasonably be expected to have the effect of, conditioning the market in the U.S. for any of thesecurities being offered in reliance on Reg. S, and it is therefore necessary for the U.S. securities

lawyers involved in an offering to analyze any relevant activity or communication in terms of its

audience, timing and content as well as in light of both the various exceptions included the definition

of “directed selling efforts” and the relevant SEC staff positions.

The requirements that offers or sales are made in offshore transactions and not involve any directed

selling efforts apply to any offering intended to fall within one of the safe harbors provided by Reg. S.

However, in order to qualify for a given safe harbor, certain additional requirements (e.g. the

implementation of additional offering restrictions and the imposition of a “distribution compliance

period”) may have to be met as well. These requirements vary depending principally on the status of

the Issuer and are generally least restrictive when it is least likely that securities offered abroad willflow into the U.S. market (Category 1) and most restrictive when adequate information about the

Issuer is not publicly available in the United States and existing potential U.S. market interest is



mayer brown 11

sufficient (i.e. there is so-called “substantial U.S. market interest ” or “SUSMI” with respect to the

relevant securities) to suggest that offerings of the Issuer’s securities outside the United States may

not come to rest abroad (Category 3). When adequate information about the Issuer is publicly

available in the United States (Category 2), the concerns about securities flowing into the U.S. market

are reduced, and the restrictions fall between these two extremes.

Rule 144A provides a safe harbor that permits resales of securities (including resales by the

Underwriters in a securities offering) only to qualified institutional buyers in the United States.

“Qualified institutional buyers” include various enumerated categories of sophisticated

institutional investors with at least $100 million of securities of non-affiliates under management as

well as SEC-registered broker-dealers owning and investing at least $10 million in securities of

non-affiliates. In addition, to be eligible for the Rule 144A safe harbor, purchasers must be notified

that a proposed sale is made pursuant to Rule 144A (typically by way of appropriate legends and

disclaimers in the offering memorandum) and the relevant securities must (i) not be of the same

class as securities listed on a U.S. exchange or quoted on a U.S. automated inter-dealer quotation

system (i.e. Nasdaq), (ii) not be convertible or exchangeable into listed or quoted securities with an

effective premium of less than 10%, and (iii) not be issued by an open-end investment company.

Finally, holders of the relevant securities and prospective purchasers designated by the holders must

have the right to obtain from the Issuer, certain “reasonably current” information about the Issuer.

Because resales of securities pursuant to Rule 144A (like any other offers and sales of securities in the

United States) are fully subject to the liability / anti-fraud provisions under the U.S. securities laws

(including Rule 10b-5 under the U.S. Securities Exchange Act of 1934, as amended (the “ Exchange

Act”)), it is market practice to provide disclosure in connection with a Rule 144A offering that is

substantially similar to the disclosure required for an SEC-registered offering, both in terms of qualityand scope. See also “–Legal Opinions and Disclosure Letters” on page 7.

European Securities Law Considerations

Across the European Economic Area (the “EEA”), Directive 2003/71/EC (as amended from time to

time, including by Directive 2010/73/ EU, the “ Prospectus Directive”) has harmonized the

requirements for the preparation, approval and publication of prospectuses for securities offered

to the public or admitted to trading on a “regulated market” situated or operating within a member

state of the EEA.

In particular, Article 3 of the Prospectus Directive prohibits offers of securities to the public in any

EEA member state that has implemented the Prospectus Directive unless a “prospectus” has beenpublished in, or published elsewhere and notified to, that member state in accordance with the

Prospectus Directive. Similarly, EEA member states must ensure that any admission of securities to

trading on a “regulated market” situated or operating within their territories is subject to the

publication of a prospectus. Pursuant to Article 13 of the Prospectus Directive, no prospectus must

be published until it has been approved by the “ competent authority” of the “home member state”

of the Issuer. If the debt securitie s proposed to be issued have a minimum denomination of at least

€1,000, the Issuer can choose to have its prospectus approved by the competent authority either (i)

where it has its registered office (if an EU entity), (ii) where it is making the offer to the public, or (iii)

where it is making an application for admission to trading on a regulated market. The “competent

authorities” for purposes of the Prospectus Directive include the UK Listing Authority (UKLA) /

Financial Conduct Authority (FCA) in the United Kingdom, the Commission de Surveillance du

Secteur Financier (CSSF) in Luxembourg, the Bundesanstalt für Finanzdienstleistungsaufsicht

(BaFin) in Germany and the Central Bank of Ireland (CBI) in Ireland, to name just a few.



mayer brown 13

THE HIGH YIELD COVENANT PACKAGE

This section provides a high-level overview of some of the general principles and key covenants that

Issuers will have to understand when negotiating and agreeing a traditional high yield covenant

package.

However, it is critical that the management of the Issuer carefully reviews (and understands) the full

contractual terms of any high yield bonds as set forth in the “Description of the Notes” in the

offering memorandum for the bonds and in the Indenture.

GENERAL OBSER VATIONS

What are the overall objective and process of negotiating a high yield covenant package?

The overall objective in negotiating a high yield covenant package is to ensure adequate protections

for the future holders of the bonds (i.e. there is little point in negotiating a highly “issuer friendly”

package that may be perceived as “off market” and therefore may potentially not be acceptable to

investors or only in return for a higher coupon) while preserving the necessary operating and

financial flexibility to allow the Issuer to execute its business plan.

To be able to do so, it is critical for all parties involved in the drafting process to analyse and be fully

familiar with the Issuer’s existing organization and capital structure and with the Issuer’s business

plan. In particular, it will often save significant time and energy during the negotiation process if the

parties take sufficient time at the outset of a transaction to consider and explore all reasonably

foreseeable transactions and activities that the Issuer may engage in while the bonds will be

outstanding and that might be restricted under the covenants, including (i) future acquisitions, joint

ventures or other investments, (ii) future financing plans (e.g. equipment financing, sale leaseback

transactions, receivable financings or other secured debt transactions), (iii) debt or debt-like

arrangements incurred in the ordinary course of business, (iv) plans for potential geographic

expansion and/or new lines of business, (v) the need for letters of credit or other credit

enhancements, (vi) expected intra-group funds flows and (vii) potential related party transactions.

As a practical matter, counsel for the Underwriters typically prepares the first draft of the

“Description of the Notes” for the offering memorandum, which will closely track (typically largely

verbatim) the relevant contractual provisions that will later be included in the Indenture. Although

Issuer’s counsel will then take a leading role in “marking up” this initial draft, it is essential that senior

management of the Issuer and its financing and accounting staff are closely involved in this process

as outside counsel cannot be expected to anticipate all flexibility the Issuer may need during the

term of the bonds.

How are high yield covenants dierent from those contained in a typical credit facility?

Other than a typical credit facility, the Indenture will not include any so-called “maintenance

covenants” which may require the Controlled Group, for example, to maintain certain ratios or to

prevent certain conditions from coming in to existence. Instead, high yield covenants impose

restrictions on certain types of activities and, in particular, the transfer of value out of the Controlled

Group . These “negative covenants” or “incurrence covenants” typically will be triggered upon

the taking of specified types of actions by the Issuer or its Restricted Subsidiaries and are basically

promises by the Issuer and its Restricted Subsidiaries to refrain from certain acts that could hurt the

Issuer’s ability to meet its obligations under the bonds. In particular, high yield covenants are




designed to (i) prevent the Controlled Group from becoming over-leveraged by either borrowing

too much or decreasing its assets without concurrently decreasing its debt, (ii) protect the position

of the bond holders in the Controlled Group’s capital structure by limiting the ability of the Issuer

and its Restricted Subsidiaries to effectively subordinate the bonds through structural or lien

subordination, and (iii) preserve the assets of the Controlled Group and the Issuer’s access to those

assets.

The covenants therefore limit the ability of the Issuer and its Restricted Subsidiaries to, among other

things:

y incur additional debt;

y pay dividends, invest outside the Controlled Group or make certain other “Restricted Payments”

that would result in value leakage out of the Controlled Group;

y grant security interests on their assets (securing indebtedness other than the bonds);

y make sales of assets and subsidiary stock;

y enter into aliate transactions;

y issue guarantees of debt of other members of the Controlled Group;

y engage in mergers or consolidations or sell substantially all the Issuer’s or a Guarantor’s assets;

y enter into transactions that would fundamentally alter the ownership structure of the

Controlled Group; and

y agree to restrictions on distributions and transfers of assets within the Controlled Group.

Issuers that are finance subsidiaries will further be limited to acting in just that capacity.

How do “baskets” work?

The ability of entities within the Controlled Group to engage in the types of transactions that are

restricted by a particular covenant will often depend on the capacity available under so-called

“baskets”. For example, as a series of exemptions from the general limitation on incurring additional

Indebtedness, the Limitation on Indebtedness covenant may include several specified baskets

denominated in the currency of the bonds, including possibly a basket for local currency debt issued

by foreign subsidiaries (for working capital purposes) and, most importantly, a basket for

Indebtedness issued under the company’s senior credit facilities.

Certain baskets may grow and get depleted over time (e.g. based on accumulated consolidated net

income of the Issuer and restricted payments made, respectively, since the date of issuance of the

bonds) and/or be “refillable ”, while other baskets may be “one-time only”. The Issuer would

naturally prefer to be able to refill baskets, for example, as Indebtedness incurred under a particular

basket is repaid, and refillable baskets have become more common. While many baskets are

traditionally expressed as specified fixed amounts in the currency of the bonds, many transactions

increasingly use “soft caps” that are expressed as the greater of a fixed amount and a percentage of,

for example, total assets. These soft caps reward Issuers for strong financial performance and

provide them with flexibility for growth over the lifetime of the bonds. In addition to specific baskets

for specific categories of transactions, covenants may also contain a so-called “ general” or “hell or



mayer brown 15

high water” basket, which may, for example, permit a limited amount of Indebtedness to be incurred

for any reason or no reason at all. Issuers should guard this basket particularly carefully, as “hell or

high water” events tend to occur far more frequently during the lifetime of the bonds than the

parties normally expect at the outset. As a general matter, it will always be more advantageous to the

Issuer to rely on a general (i.e. “non-basket”) exemption to a covenant for a particular transaction or

a basket designed for a specific category of transactions, rather than on a general basket.

How long will the restrictions under the covenants apply?

Generally, the covenants will apply for as long as the bonds are outstanding. Other than with

relatively common and uncomplicated waivers or amendments under a traditional senior credit

facility, waivers or amendments of the terms of a bond typically require the Issuer to solicit consents

from a (qualified) majority or possibly all bond holders, which can be costly and time-consuming. It is

therefore particularly important to “get everything right” at the outset.

For some Issuers on the cusp of investment grade, it is sometimes possible to negotiate “ fall away

covenants” whereby most of the high-yield covenants will automatically “fall away” (i.e. actually only

be suspended), if (and for as long as) the long-term debt of the Issuer receives an investment grade

rating from both Moody’s and Standard & Poor’s (or 2 out of 3 rating agencies). In that case, only the

basic (i.e. less restrictive) investment grade covenants would remain, such as the covenants with

regard to liens, sales and leaseback transactions, mergers, change-of-control events and reporting.

What law should govern the bonds?

High yield bonds originally developed in the United States and most traditional “high yield bonds”

(including high yield bonds issued by Issuers in Europe and Asia) continue to be governed by New

York law, although there have been a growing number of “local law” governed high yield bonds in

certain jurisdictions (e.g. Germany).

Which law should govern the bonds should be discussed at the outset of a transaction between the

Issuer, the Underwriters and their counsels and may depend on a variety of factors, including

“marketability” considerations and the target investor audience for the particular offering (i.e.

depending on the particular Issuer and current state of the market, U.S. investors may be a key target

group and there may well be a bias in favour of New York law). Due to the long history of high yield

bonds and well established case law in New York, New York law also offers the additional advantage

over certain other “local laws” that it is “tried and tested” and may therefore offer greater legal

certainty to both the Issuer and investors, in particular in case of necessary future restructurings. On

the other hand, many non-U.S. issuers may be reluctant to agree to the jurisdiction of the New York

courts to decide any future disputes with holders of their bonds and may generally be more familiar

and comfortable with their own, local law.

Irrespective of which law governs the bonds, the substance and wording of the covenants in a typical

high yield bond as described below will be substantially similar, and it is therefore frequently possible

to switch (i.e. change the governing law) without too much extra work shortly before the Launch of

an offering in response to shifting market conditions.




LIMITATION ON INDEBTEDNESS

What does this covenant restrict?

The Limitation on Indebtedness covenant limits the ability of the Issuer and its Restricted

Subsidiaries to incur additional Indebtedness and is intended to prevent the Issuer from getting

over-leveraged, which could negatively affect the capacity of the Issuer to service all its outstanding

debt (including the bonds) and, as a result, the market value of the bonds.

“Indebtedness” for the purpose of the covenant is typically defined broadly and generally includes all

borrowed money as well as other obligations similar to claims against the issuer for borrowed

money or related to different financing methods, such as capital leases, sale and lease back

transactions, obligations to pay deferred purchase prices for property and other obligations to pay

money. It typically does not include ordinary course trade payables or other debt routinely incurred

and repaid in the ordinary course. See also “–The “Permitted Debt” Exemption” on page 17.

Were the Controlled Group to become more highly leveraged, this covenant would generally

prevent it from incurring additional Indebtedness until its financial condition improves.

The “Coverage Ratio” Exemption

Whether or not the Issuer and its Restricted Subsidiaries are permitted to incur additional

Indebtedness under the Limitation on Indebtedness covenant is typically determined by reference

to the so-called “Coverage Ratio” or “Fixed Charges Coverage Ratio”, i.e. the Issuer and its

Restricted Subsidiaries will only be permitted to incur additional Indebtedness (so-called “ Ratio

Debt”) so long as the Coverage Ratio is at least equal to an agreed ratio on a pro forma basis aftergiving effect to the incurrence of the proposed additional Indebtedness.

The Coverage Ratio is negotiated between the Issuer and the Underwriters and will therefore vary for

different Issuers. In the Western European market, however, a Coverage Ratio of around 2.00 to 1.00

is common. In some transactions, Issuers may be able to negotiate a Coverage Ratio that “steps up”

over time, but the Coverage Ratio Exemption is typically not available at the time of issuance of the

bonds.

The “Coverage Ratio” serves as an indication of the capacity of the Controlled Group to generate

sufficient amounts of cash to service their fixed obligations, such as regular interest expenses under

outstanding Indebtedness, and it is calculated for any given point in time by dividing:

y Consolidated EBITDA (earnings before interest, taxes, depreciation, amortization and certain

non-cash charges) of the Controlled Group for the preceding four scal quarters by

y the sum of the xed charges of the Controlled Group (i.e. Consolidated Interest Expenses and

certain other interest-equivalent items) for the same period.

“Consolidated EBITDA”, “Consolidated Interest Expense” and “ Coverage Ratio” will typically contain

a number of detailed, negotiated adjustments or add-backs to the related standard accounting

measures under the generally accepted accounting principles (GAAP) applied by the Issuer in

preparing its financial statements (i.e. IFRS, US GAAP, HGB, …….). These adjustments / add-backs may

include, for example, adjustments for certain extraordinary items and non-cash items; pro forma

adjustments related to permitted investments, acquisitions or divestments and adjustments forrelated expenses; as well as add-backs for certain financing expenses. It is therefore critical for the

Issuer, its accountants and its legal advisers to carefully review all relevant definitions.



mayer brown 17

The “Permitted Debt” Exemption

In addition, the Limitation on Indebtednes s covenant will also specify numerous categories of“Permitted Debt” that will be permitted to be incurred by the members of the Controlled Group

regardless of their financial performance or condition and without their having to meet the Coverage

Ratio test. The specific categories of Indebtedness covered by this exemption will be negotiated

between the Issuer and the Underwriters and set forth in the text of the Limitation on Indebtedness

covenant. These exemptions will typically include various categories of “technical indebtedness” , i.e.

items that are technically Indebtedness, but should not be prohibited such as undrawn letters of credit,

qualified securitizations or hedging obligations. These items may either be designated as “ Permitted

Debt” or carved-out of the definition of “Indebtedness” altogether. In addition, the covenant will

include a number of specific baskets subject to caps, for example, for debt issued under senior credit

facilities or for local currency debt issued by foreign subsidiaries for working capital purposes.

Which exemption applies?

To the extent the incurrence of a specific item of Indebtedness satisfies more than one exemption or

basket, the Issuer has the right under the Limitation on Indebtedness covenant to designate the

specific exemption or basket under which the relevant item of Indebtedness is being incurred.

Because Indebtedness incurred in reliance on a basket will count against the Issuer in calculating

future compliance with the Coverage Ratio and also use up capacity under the relevant basket, an

Issuer will typically want to designate as much additional debt as possible as having been incurred

pursuant to the Coverage Ratio Exemption, as opposed to pursuant to a specified basket amount.

In the event an item of Indebtedness meets the criteria for either Ratio Debt and/or more than one of

the types of Permitted Debt, the Issuer, in its sole discretion, will be permitted to classify and may

from time to time reclassify any item of Indebtedness other than Indebtedness incurred under the

Permitted Indebtedness basket that exempts Indebtedness incurred under the senor credit facilities.

In particular, if the financial performance of the Issuer improves (resulting in increased debt

incurrence capacity under the Coverage Ratio exemption), the Issuer will typically (but not always)

be permitted to reclassify debt initially incurred under one or more Permitted Debt baskets as Ratio

Debt, thereby freeing up capacity under the relevant Permitted Debt baskets, which will continue to

be available even if the financial performance of the Issuer subsequently deteriorates again.

Other potential limitations on Indebtedness?

In evaluating whether the Limitation on Indebtedness covenant provides sufficient flexibility for the

Issuer, the Issuer and its advisers should also consider the Limitation on Liens covenant to the extent

the Issuer may need the ability to incur Indebtedness that is secured by liens on any assets of the

Issuer or its Restricted Subsidiaries. In capital intensive industries, in particular, companies may rely

heavily on certain secured nanincing arrangements with customers or suppliers in the ordinary

course of business.

The Limitation on Restrictions on Dividends and Other Payments from Restricted Subsidiaries

covenant may also be relevant, because lenders may require contractual restrictions on dividends,

asset transfers and other payments by the borrowing entity within the Controlled Group.




LIMITATIONS ON RESTRICTED PAYMENTS


The Limitation on Restricted Payments covenant is designed to prevent “leakage” of funds from the

Controlled Group by limiting the ability of the Issuer and its Restricted Subsidiaries to transfer cash or

other assets to persons or entities outside of the Controlled Group. Specifically, the covenant restricts

the ability of the Issuer and its Restricted Subsidiaries to make certain “Restricted Payments”, which

include:

y the payment of cash dividends or certain other distributions to shareholders (other than

to another member of the Controlled Group and to minority shareholders of Restricted

Subsidiaries on a pro rata basis);

y

repurchases, redemptions or (pre-)payments, as applicable, of equity interests or Indebtednessthat is subordinate in right of payment to the bonds;

y Investments in any third parties (i.e. entities that are not majority controlled, including 50/50

joint ventures); and

y loans to or credit support for any third parties.

The term “Investment” is defined very broadly and consists generally of:

y purchases of equity or debt securities of another entity;

y capital contributions to any entity; and

y loans to or guarantees or other credit support for the benet of any entity.

Investments are generally treated as Restricted Payments because they typically involve assets of

the Issuer or its Restricted Subsidiaries being transferred to a third party outside the Controlled

Group and therefore not subject to the restrictions under the Indenture.

The covenant does not restrict acquisitions of companies that become Restricted Subsidiaries,

capital expenditures and most intra-group loans and guarantees as all of these transactions

represent investments “in the system” / within the Controlled Group.

The “Net Income Basket” Exemption

Under the Limitation on Restricted Payments covenant, members of the Controlled Group are

typically prevented from making any Restricted Payments unless:

y the Issuer would have been able to incur at least €1.00 of additional Indebtedness under the

Coverage Ratio on a pro forma basis after giving eect to the Restricted Payment (the “€1.00 of

Additional Indebtedness Test”);

y the Issuer is not in default under the Indenture; and

y the aggregate amount of Restricted Payments does not exceed the sum of the following:

– 50% of consolidated net income (or in the case of a loss, minus 100% of the loss) from the

rst day of the rst scal quar ter commencing either immediately prior to or af ter the issue

date of the bonds and the most recent scal quarter ending prior to the date of the

Restricted Payment for which consolidated nancal statements for the Issuer are available;– 100% of the aggregate net cash proceeds and fair market value of marketable securities

from sales of the Issuer’s stock and certain other types of capital contributions received

since the issue date of the bonds;



mayer brown 19

– 100% of the value of certain Restricted Payments that are “reversed” (e.g. sale of a Restricted

Investment or Investments in entities that subsequently become Restricted Subsidiaries);

– 100% of distributions received from Unrestricted Subsidiaries; and

– the amount by which Indebtedness has been reduced on the Issuer’s balance sheet as a

result of the conversion or exchange of such Indebtedness into equity of the Issuer after the

issue date of the bonds

(collectively, the “Net Income Basket” or “Builder Basket”).

“Permitted Restricted Payments” and “Permitted Investments”

Certain Restricted Payments can be made without regard to the Net Income Basket and the specific

categories of such “Permitted Restricted Payments” or “Permitted Investments” (including in

some cases specific baskets) will be negotiated between the Issuer and the Underwriters and setforth in the text of the Limitation on Restricted Payments covenant and the related definitions. In

this context, the parties must take special care in drafting the relevant exemptions to permit the

creation of, or investment in, joint ventures that are not controlled by the Issuer.

LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS FROM RESTRICTED

SUBSIDIARIES

What does this covenant prohibit?

This covenant is designed to ensure that the Issuer has adequate access to the assets and cash flows

of its Restricted Subsidiaries, i.e. that any cash generated by the Restricted Subsidiaries can flowfreely up to the Issuer to enable the Issuer to meet its obligations under the bonds. The covenant

therefore prohibits the Issuer and its Restricted Subsidiaries from creating contractual obligations

(so-called “Dividend Blockers” or “Dividend Stoppers”) that limit the ability of the Restricted

Subsidiaries to declare and pay dividends, make loans or transfer property or assets to the Issuer or

any other Restricted Subsidiaries.

This can create problems in the case of joint ventures entered into by the Issuer or its Restricted

Subsidiaries because the partner in a joint venture will typically have a say in the payment of

dividends (i.e. may be able to veto a dividend payment). One possible solution may be the formation

of a joint venture that is less than 50% owned by the Issuer. In this case, the joint venture would be a

non-subsidiary that is not subject to the covenants under the Indenture. However, any Investment inthe joint venture would then be a Restricted Payment that would have to meet the conditions under

the Limitations on Restricted Payments covenant.

What are common exemptions to the covenant?

The covenant will include a number of common exemptions from the general prohibition, including

for Dividend Blockers or other payment restrictions that arise under or are imposed by:

y existing Indebtedness;

y restrictions already in place when a subsidiary is acquired;

y applicable law;

y customary lease provisions; or

y renancings of existing Indebtedness if the limitations are not more restrictive than those being

renanced.




What other covenants might be relevant?

The covenant should be reviewed in conjunction with the Limitation on Indebtedness covenant

since Indebtedness that otherwise may be incurred may be limited by this covenant if the terms of

the additional Indebtedness contain any provisions that restrict the movement of cash or assets

around the Controlled Group.

LIMITATION ON LIENS


The Limitation on Liens covenant is designed to ensure that in a potential bankruptcy, insolvency or

restructuring scenario, other creditors of the Controlled Group do not have any prior claims over

the assets of the members of the Controlled Group compared to the bondholders.

To achieve this goal, the members of the Controlled Group provide a “negative pledge” that limits

their ability to grant liens (other than “Permitted Liens”) on assets that do not constitute collateral

for the bonds, unless they grant equal and ratable liens to holders of the bonds. It will also generally

not allow the creation of a lien on any asset that does constitute collateral for the bonds other than

specific “Permitted Collateral Liens” defined in the Indenture.

The covenant will be almost identical to the relevant covenant contained in a typical senior credit facility

and it is important to match up the definition of “Permitted Liens” with same definition in the Issuer’s

senior credit facility. There should not be any liens permitted by the Issuer’s senior credit facility that would

not be permitted under terms of bonds, although the terms of the bonds may permit additional liens.

“Permitted Liens” typically include:

y liens securing Indebtedness under credit facilities (generally tied to the amount permitted under

the clause for bank debt under the denition of Permitted Indebtedness);

y purchase money liens;

y liens on acquired property;

y liens on renanced secured indebtedness;

y existing liens; and

y liens necessary to operate the Controlled Group’s business.

What other covenants might be relevant?

As discussed on page 17 above, it is important to evaluate the Limitation on Liens covenant together

with the Limitation on Indebtedness covenant.

LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK


The Limitation on Sales of Assets and Subsidiary Stock covenant describes the permitted use of

proceeds from Asset Sales by the Issuer and its Restricted Subsidiaries. Asset Sales are a potential cause

for concern for holders of the bonds because they may result in potentially income producing assetsleaving the Controlled Group. The covenant therefore requires the Issuer and its Restricted

Subsidiaries to either reinvest the proceeds of significant Asset Sales in their current businesses (i.e. by



mayer brown 21

purchasing “Replacement Assets” or “Additional Assets”, typically defined as other long-term assets

used in their businesses) or to use those proceeds to permanently repay Indebtedness.

“Assets Sales” is typically defined broadly and will generally include traditional asset disposals as

well as any direct and indirect sales of interests in the Restricted Subsidiaries, including any issue of

new shares of a Restricted Subsidiary or any disposition by means of a merger, consolidation or

similar transaction. At the same time, the definition will list numerous categories of asset disposals

that do not need to satisfy the Asset Sale Test, including various ordinary course transactions and a

carve-out for transactions below a specified minimum fair market value.

For any transactions that are covered by the definition of “Asset Sale”, the covenant typically

requires (the following conditions together, the “Asset Sale Test”) that:

y the Issuer or its Restricted Subsidiaries receive consideration equal to the fair market value of

the assets sold;

y at least a specied percentage (e.g. 75%) of the consideration received is in the form of cash and

cash equivalents or a combination thereof (i.e. no asset swaps); and

y the net available cash proceeds from the Asset Sale are applied by the Issuer or relevant

Restricted Subsidiary within a specied period of time (e.g. 365 days) either:

– to repay, prepay or repurchase certain types of qualifying Indebtedness; or

– to purchase Replacement Assets or Additional Assets.

To the extent the net available cash proceeds from an Asset Sale are not applied in accordance with

the Asset Sale Test and exceed a specified minimum threshold amount (i.e. a basket negotiated by

the Issuer), the Issuer must use those excess proceeds to make an offer to repurchase (a portion of)

the bonds at their face value plus accrued interest and other pari passu Indebtedness with similar

provisions.

Cash, of course, is fungible, and as long as a company undertakes (budgeted) capital expenditures

on property, plant and equipment within the relevant timeframe following an Asset Sale and in

amounts at least equal to the related sales proceeds, compliance with the covenant should not

normally be too difficult and not require any offer to repurchase bonds.

LIMITATION ON AFFILIATE TRANSACTIONS

The Limitation on Affiliate Transactions covenant prohibits transactions between the Issuer and itsRestricted Subsidiaries on the one hand and affiliated parties outside the Controlled Group on the

other hand, unless they meet the following conditions:

y the aliate transaction must be on an arm’s length basis, i.e. on terms no less favorable to the

Issuer or the relevant Restricted Subsidiary than those that could have been obtained from a

third party;

y if the value of the transaction exceeds a specied threshold amount, the transaction must be

approved by a majority of the disinterested directors on the Issuer’s board; and

y if the value of the transaction exceeds a higher specied threshold amount, the Issuer must also

obtain a written fairness opinion from an independent recognised expert.

By its terms, the Limitation on Affiliate Transactions covenant will expressly not apply to various

categories of ordinary course transactions and transactions permitted by the Limitation on

Restricted Payments covenant.




LIMITATION ON DESIGNATION OF “RESTRICTED” O R “UNRESTRICTED” SUBSIDIARIES

What is the purpose of this covenant?

This covenant is intended to ensure that the various other covenants are not thwarted through the

designation and re-designation of Restricted and Unrestricted Subsidiaries. It will typically be a

stand-alone covenant, but sometimes the following concepts are integrated in the definitions of

“Unrestricted Subsidiary”, “Incurrence” or “Investment” and/or within the “Limitations on Restricted

Payments” covenant.

What are the consequences of re-designating a subsidiary as “restricted” or “unrestricted”?

As a general rule, the Issuer may designate and re-designate its subsidiaries as either “restricted” or

“unrestricted” at any time. However, because the covenants generally will not apply to Unrestricted

Subsidiaries, bondholders will view the designation by the Issuer of subsidiaries as restricted or

unrestricted as a way to potentially circumvent the restrictions on investments, on incurring

indebtedness or on making acquisitions and dispositions that would otherwise apply.

By designating a subsidiary as unrestricted, the Issuer will therefore be deemed to have made an

Investment (in an amount equal to the fair market value of the Issuer’s or its Restricted Subsidiary’s

interest in the subsidiary at the time of the designation) in that subsidiary. The Issuer must therefore

typically be able to satisfy the following conditions to be able to re-designate a Restricted Subsidiary

as an Unrestricted Subsidiary:

y it must comply with the Limitation on Restricted Payments covenant (i.e. the fair market value of

the Issuer’s (deemed) Investment in the relevant subsidiary at the time of re-designation mustbe permitted under that covenant);

y it must comply with the Limitation on Indebtedness covenant (i.e. any guarantee by the Issuer or

the remaining Restricted Subsidiaries of any Indebtedness of the Unrestricted Subsidiary will be

deemed to be an incurrence of additional Indebtedness);

y the relevant subsidiary cannot hold capital stock or Indebtedness of, or hold any liens on the

assets of, or have any Investment in, the Issuer and its remaining Restricted Subsidiaries;

y it must comply with the Limitation on Aliate Transactions covenant (i.e. any agreement,

transaction or arrangement between the newly Unrestricted Subsidiary and the Issuer and its

remaining Restricted Subsidiaries must comply with that covenant;

y the Issuer and its remaining Restricted Subsidiaries must not have any obligation to (i) subscribefor additional equity of the newly Unrestricted Subsidiary or (ii) maintain or preserve the

nancial condition of the newly Unrestricted Subsidiary; and

y no default or event of default under the Indenture would exist following the re-designation.

In addition, the net income and cash flow of Unrestricted Subsidiaries are normally excluded from

the relevant calculations in determining any capacity by the Issuer and its Restricted Subsidiaries , for

example, to pay dividends, make Investments or incur additional debt under the various ratio tests.

Conversely, the following conditions must be satisfied for the re-designation of an Unrestricted

Subsidiary as a Restricted Subsidiary:

y any Indebtedness of the newly Restricted Subsidiary must be able to be incurred under

Limitation on Indebtedness covenant (i.e. because any such Indebtedness would be deemed to

have been incurred by the Controlled Group at the time of re-designation);



mayer brown 23

y any Investment by the newly Restricted Subsidiary must be able to be made in accordance with

Limitations on Restricted Payments covenant;

y any liens on assets of the newly Restricted Subsidiary must be in compliance with the Limitation

on Liens covenant; and

y no default or event of default under the Indenture would exist following the re-designation.

LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS

The Limitation on Issuances of Guarantees covenant is intended to prevent the Issuer from

structurally subordinating the bonds to other Indebtedness by putting bondholders in the same

position as if potential guarantees by non-Guarantor subsidiaries had not been made. Bondholders

would be effectively subordinated if a Restricted Subsidiary were to guarantee other Indebtedness

of the Issuer or a Restricted Subsidiary without guaranteeing the bonds on an equal basis, because ina potential default/insolvency scenerio, proceeds from the sale of assets of that subsidiary would be

applied first to satisfy its creditors and the debt guaranteed by it before they would be available to

satisfy obligations under the bonds.

The covenant therefore provides that no Restricted Subsidiary that is not a Guarantor of the bonds

may guarantee any other Indebtedness unless it also guarantees the bonds on at least a pari passu

basis with any such other Indebtedness.

LIMITATION ON MERGER, CONSOLIDATION AND SALE OF SUBSTANTIALLY ALL ASSET S

The goal of this covenant is to prevent a business combination in which the surviving entity is not

financially healthy, as measured by the Coverage Ratio test and (sometimes) a consolidated net

worth test, or otherwise does not have the same basic characteristics of the Issuer. The covenant

prohibits the Issuer from merging with or consolidating into another entity, or transferring all or

substantially all its assets and the assets of its Restricted Subsidiaries, as a whole, to another entity,

unless the following general conditions are satisfied:

y either the Issuer is the surviving entity or the surviving entity is an entity organized under the laws

of a specied jurisdiction (e.g. the laws of the Issuer’s jurisdiction of organization or the laws of a

European Union member state or the United States);

y the surviving entity, if other than the Issuer, assumes all of the Issuer’s obligations under the

Indenture;

y the Issuer or the surviving entity would be able to satisfy the €1.00 of Additional Indebtedness

Test; and

y no default or event of default under the Indenture exists either before or as a result of the

transaction.

Sometimes, this covenant contains an additional condition that the consolidated net worth of Issuer

or the surviving entity must be at least equal to the consolidated net worth of the Issuer prior to the

relevant transaction.

Because certain transactions restricted by this covenant may also constitute a Change of Control,

that would potentially give bondholders the option to put their bonds back to the Issuer, this

covenant must be reviewed and negotiated together with the Change of Control covenant.




CHANGE OF CONTROL

The Change of Control covenant protects bond holders from fundamental changes in theownership structure of the Issuer. Investors have traditionally insisted on a “change of control put

option”, because the identity (and track record) of the ultimate owners / sponsors of an Issuer can be

a signicant factor in their overall investment decision. This can be particularly true for portfolio

companies of private equity sponsors that are repeat players in the high yield markets.

Upon the occurrence of any of a series of specified “Change of Control Events”, the Issuer is

therefore typically required to make an offer (a “Change of Control Offer ”) to repurchase the

bonds at a specific percentage (typically 101%) of their principal amount.

The specific “Change of Control Events” can be heavily negotiated between the Issuer and the

Underwriters (especially where an IPO or partial sale of the Issuer within the term of the bonds are

viewed as a realistic scenario), but will ordinarily include:

y the acquisition by a person or group of persons (other than “Permitted Holders”) of more than

a specied percentage ( < 50%) of the Issuer’s voting capital;

y a change in the majority of the board of directors of the Issuer, unless approved by the outgoing

directors; and

y certain dispositions of all or substantially all of the assets of the Issuer and its Restricted

Subsidiaries.

At the same time when private equity ownership, for example, can be a key factor in the investment

decision of a bond investor, “portability” of a bond is typically signicantly more important for

private equity sponsors (who are in the business of buying and selling companies), than for other / corporate-ow ned issuers. As a result , there has been a growing trend in European high- yield

issuances by private equity-owned companies in recent years to include additional conditions

for when a Change of Control Event triggers the requirement to make a Change of Control Oer,

thereby providing private equity sponsors greater exibility to exit their investments. For example,

these additional conditions may include the requirement for a change in ownership to result in a

ratings downgrade or withdrawal or, more frequently, the failure of the Issuer to meet a specied

leverage test, both immediately before the event and immediately thereafter and giving pro forma

eect thereto. In practice, the relevant provisions often take the form of specically negotiated

“Specied Change of Control Events” that are deemed not to constitute a “Change of Control

Event”.

Although these so-called “portability features” have become more common in European high yield

issuances for private equity-owned companies, they are still considered very “sponsor-friendly”, and

they are not generally a feature of high yield bonds issued by corporate-owned issuers.



mayer brown 25

REPORTING

The purpose of this covenant is to ensure the continuous availability of current information on thefinancial performance of the Issuer. Although it may seem like a “boiler-plate” provision, potential

investors in the bonds can be very sensitive about the content of this covenant and generally require

the Issuer to provide full public disclosure for as long as the bonds are outstanding.

This is because the public availability of current information on the financial performance of the

Issuer is not only critical for the development of a liquid market in the bonds, but is also necessary to

protect bondholders that may wish to sell their bonds from potential liability for market abuse (i.e.

insider trading). In addition, the availability of current financial information about the Issuer is also

necessary to permit U.S. investors in the bonds to on-sell their bonds within the United States in

reliance on Rule 144A. See “Introduction – Certain Securities Law Considerations – U.S. Securities

Law Considerations” on pages 10 and 11.




INDICATIVE TRANSACTION TIMETABLE

Under ideal circumstances and with the full commitment of all parties involved in the offering, the

preparations for a high yield bond offering for a first-time issuer can be completed within about 8

weeks from the initial kick-off meeting to “launch” of the offering, although the actual preparation

time will always depend on a variety of factors that are specific to the individual Issuer and each

offering.

Key factors that can (very significantly) extend the preparation time required for a particular

offering include (i) the lack of existing, high-quality, English language disclosure language for the

Issuer that can be “recycled” when preparing the offering circular, (ii) the time required by the

Issuer’s internal accounting team and external auditors to prepare required financial information,

(iii) potential general resource constraints / availability of dedicated staff at the Issuer for the

offering, (iv) complications and delays in any necessary negotiations with existing creditors of theIssuer, (v) potential complexities involved in releasing existing security interests (in favor of creditors

that are being repaid) and in creating new security interests (in favor of the bondholders), potentially

in multiple jurisdictions, (vi) potential delays and complications in the ratings process, as well as (vii)

general market conditions.

Time Tasks

Week 1 • Issuer’s counsel to prepare initial outline of oering memorandum and discuss with Issuer

• Issuer, Underwriters and Issuer’s counsel to agree structure

• Issuer and Issuer’s counsel to have covenant discussion, make proposal to the

Underwriters regarding any key concerns

• Issuer to prepare data room based on due diligence request list provided by Issuer’s counsel

and Underwriters’ counsel

• Underwriters circulate management due diligence questionnaire

• Publicity guidelines circulated by Issuer’s counsel

• Research guidelines circulated by Underwriters’ counsel

Week 2 • Management presentation to working group

• Issuer, Underwriters and their counsel to agree approach with regard to existing lenders

and security trustee

• Working group to provide high level feedback on draft oering memorandum

• Issuer and Issuer’s counsel to work together on updating draft oering memorandum

• Issuer’s counsel and Underwriters’ counsel commence documentary due diligence

• Underwriters and counsel draft description of notes/terms and conditions and bond

documentation



mayer brown 27

Time Tasks

Week 3 • Stock exchange for listing bonds selected

• Trustee and Trustee’s counsel selected

• Draft of oering memorandum recirculated by Issuer’s counsel

• Draft description of notes circulated by Underwriters’ counsel

• Draft documentation for Trustee accession arrangements to existing security

(if applicable)

• Review of draft oering memorandum by Underwriters and counsel and preparation by

them of consolidated mark up

• Issuer and Issuer’s counsel to discuss description of notes

• Drafting session on oering memorandum

• Draft accountants engagement and comfort letters circulated• Draft purchase (underwriting) agreement circulated by Underwriters and counsel

• Issuer and Underwriters work on ratings agency presentation

• Further discussions with regard to security trustee and lender consents and approach to

existing lenders if required

Week 4

• Draft oering memorandum recirculated to working group

• Mark up of description of notes circulated by Issuer’s counsel

• Review of draft oering memorandum by Underwriters and counsel and preparation by

them of consolidated mark up

• Underwriters, Issuer and counsel to discuss description of notes

• Drafting session on draft oering memorandum

• Issuer and Issuer’s counsel to discuss and comment on purchase agreement, distribute

mark up to Underwriters and Underwriters’ counsel

• Issuer and Underwriters work on ratings agency presentation

Week 5 • Drafting sessions on oering memorandum as necessary

• Discussions on description of notes ( including with Trustee and its counsel), Trustee note

accession arrangements

• Discussions on purchase agreement as necessary

• Issuer and underwriters work on ratings agency presentation

• Work on road show presentation

Week 6 • Draft oering memorandum submitted to stock exchange and send draft oering

memorandum to printers (if suciently advanced)

• Drafting sessions on oering memorandum as necessary


• Meetings with rating agencies

• Work on road show presentation

Week 7 • Receive stock exchange comments and incorporate into oering memorandum and

resubmit oering memorandum to exchange

• Finalise description of notes





Time Tasks

Week 8 • Board meeting to approve issue of preliminary oering memorandum, appoint committee

to approve pricing, approve contractual documentation when nalised

• Finalise preliminary oering memorandum, including with stock exchange

• Finalise purchase agreement

• Finalise road show presentation

• Security trustee and any lender consents obtained

• Receive preliminary feedback from ratings agencies

• Print preliminary oering memorandum

• Announce and launch oering

Following the “Launch” of the offering (i.e. the formal, external announcement of the proposed

offering), the Issuer and the Underwriters will go on an investor roadshow (typically for between a

few days and two weeks), while other members of the working group finalise the listing, bond rating

and contractual documentation (including Indenture, guarantees and security documents).

Since most of the key European high yield investors are based in London, Paris or Frankfurt, most

European high yield roadshows will include visits to those three cities. Other common roadshow

stops include Amsterdam and Edinburgh, and further stops may be included based on the

nationality or particular industry of the Issuer, the market environment or other factors.

Following completion of the roadshow, a final “bring-down due diligence call” with management

of the Issuer and delivery of a comfort letter from the Issuer’s auditors, the Issuer and the

Underwriters will meet for the “Pricing” of the bond offering, i.e. agree on the exact terms of theoffering (e.g. size, coupon and maturities). Following the Pricing meeting, the Issuer, any Guarantors

and the Underwriters will sign the purchase agreement, at which point both the Issuer and the

Underwriters are contractually committed to complete the offering, subject to certain closing

conditions.

Following the Pricing and execution of the purchase agreement, Issuer’s and Underwriters’ counsel

will prepare the final offering memorandum and finalize and collect signatures for the various

closing documents (including bring-down comfort letters, legal opinions and disclosure letters) in

preparation for the “Closing” of the transaction. The Closing is the formal issuance and delivery of

the bonds by the Issuer against payment therefore by the Underwriters and will take place a few

business day after Pricing to allow sufficient time to prepare the necessary documentation andcollect the purchase price for the bonds from investors.



mayer brown 29

GLOSSARY

Term Page

€1.00 of Additional Indebtedness Test......................................................................................................................... 18

Additional Assets .......................................................................................................................................................................... 21

Affiliate Transactions ................................................................................................................................................................. 21

Asset Sale............................................................................................................................................................................................. 20, 21, 23

Asset Sale Test ................................................................................................................................................................................. 21

Baskets .................................................................................................................................................................................................. 14

Builder Basket .................................................................................................................................................................................. 19

Closing ................................................................................................................................................................................................... 27

Change of Control ........................................................................................................................................................................ 24

Change of Control Event ......................................................................................................................................................... 24

Change of Control Offer ......................................................................................................................................................... 24

Comfort Letter ............................................................................................................................................................................... 7

Competent Authority ............................................................................................................................................................... 11

Consolidation .................................................................................................................................................................................. 23

Controlled Group ......................................................................................................................................................................... 9

Covenants ........................................................................................................................................................................................... 13

Coverage Ratio ............................................................................................................................................................................... 16

Disclosure Letter ........................................................................................................................................................................... 7

Directed Selling Effort s ............................................................................................................................................................ 10

Dividends................................................. ............................................................................................................................................ 18, 19

Dividend Blockers......................................................................................................................................................................... 19

Dividend Stoppers ....................................................................................................................................................................... 19

Description of Notes (DoN) ................................................................................................................................................. 5

Documentation ............................................................................................................................................................................. 5

Down-stream Guarantees ..................................................................................................................................................... 8

Due Diligence ................................................................................................................................................................................... 7, 27

EEA ........................................................................................................................................................................................................... 11

Exchange Act.................................................................................................................................................................................... 11

Exchange- Regulated Market ............................................................................................................................................... 12

Fall Away Covenants................................................................................................................................................................... 15

Fiscal Agency Agreement ...................................................................................................................................................... 6

Fixed Charges Coverage Ratio ............................................................................................................................................ 16

Governing Law ................................................................................................................................................................................ 15

Guarantees ........................................................................................................................................................................................ 23




Term Page

Guarantors......................................................................................................................................................................................... 8Hell-or-High Water ...................................................................................................................................................................... 15

Incurrence Covenants .............................................................................................................................................................. 13

Indebtedness ................................................................................................................................................................................... 16

Indenture............................................................................................................................................................................................. 6

Initial Purchasers ........................................................................................................................................................................... 6

Intercreditor Agreement ........................................................................................................................................................ 5, 6

Investment ......................................................................................................................................................................................... 18

Issuer....................................................................................................................................................................................................... 6Joint Ventures .................................................................................................................................................................................. 18, 19

Launch ................................................................................................................................................................................................... 26

Legal Opinions ................................................................................................................................................................................ 7

Liens ........................................................................................................................................................................................................ 20

Maintenance Covenants ......................................................................................................................................................... 13

Merger ................................................................................................................................................................................................... 23

MD & A ................................................................................................................................................................................................... 5

Negative Assurance Letter.................................................................................................................................................... 7

Negative Covenants ................................................................................................................................................................... 13

Net Income Basket ....................................................................................................................................................................... 19

Offer ing Circular (OC) .............................................................................................................................................................. 5

Offer ing Memorandum (OM) ............................................................................................................................................ 5

Off shore Transactions ............................................................................................................................................................. 10

Partie s .................................................................................................................................................................................................... 7

Payment Blockage Provisions............................................................................................................................................. 3

Permitted Debt ............................................................................................................................................................................... 17

Permitted Holders ....................................................................................................................................................................... 24

Permitted Liens .............................................................................................................................................................................. 20

Permitted Investments ............................................................................................................................................................ 19

Permitted Restricted Payments........................................................................................................................................ 19

Portabilit y ........................................................................................................................................................................................... 24

Pricing .................................................................................................................................................................................................... 27

Prospectus ......................................................................................................................................................................................... 5

Prospectus Directive ................................................................................................................................................................. 11

Publicity ................................................................................................................................................................................................ 9

Publicity Guidelines ..................................................................................................................................................................... 9



mayer brown 31

Term Page

Purchase Agreement ................................................................................................................................................................. 7Qualified Institutional Buyers (QIBs) ............................................................................................................................. 11

Underw riters .................................................................................................................................................................................... 7

Ratio Debt ........................................................................................................................................................................................... 16

Regulated Market.......................................................................................................................................................................... 11

Regulation S (Reg. S) ................................................................................................................................................................... 10

Replacement Assets ................................................................................................................................................................... 20

Reporting ............................................................................................................................................................................................ 24

Restricted Payments .................................................................................................................................................................. 18Restricted Subsidiaries .............................................................................................................................................................8, 9, 14, 22, 23

Roadshow ........................................................................................................................................................................................... 26,27

Rule 10b-5 Letter ........................................................................................................................................................................... 7

Rule 144A ............................................................................................................................................................................................. 10

SEC ............................................................................................................................................................................................................ 10

Securities Act ................................................................................................................................................................................... 10

Securities Laws ............................................................................................................................................................................... 9

Senior Notes ..................................................................................................................................................................................... 3Standstill Provisions .................................................................................................................................................................... 3

Subordinated Notes ................................................................................................................................................................... 3

Subordination ................................................................................................................................................................................. 3

Contractual Subordination....................................................................................................................................... 3

Structura l Subordination ........................................................................................................................................... 4

Lien Subordination .......................................................................................................................................................... 5

Subscription Agreement ........................................................................................................................................................ 6

Substantial U.S. Market Interest / SUSMI ..................................................................................................................... 11Time table ............................................................................................................................................................................................ 25

Trustee ................................................................................................................................................................................................... 6

Up-Stream Guarantees ............................................................................................................................................................ 8

Unregulated Market.................................................................................................................................................................... 12

Unrestricted Subsidiaries ....................................................................................................................................................... 8, 9, 22

Underw riters .................................................................................................................................................................................... 6

Underw riting Agreement....................................................................................................................................................... 6

Underwr iting Discount ............................................................................................................................................................ 6

Underw riting Spread ................................................................................................................................................................. 6

Whole-Sale Debt Exemption ............................................................................................................................................... 12




OTHER KEY MEMBERS OF OUR GLOBAL HIGH YIELD PRACTICE INCLUDE:

Hong Kong

Jason T. Elder

Partner

jason.elder@ mayerbrownjsm.com

16th - 19th Floors, Prince’s Building

10 Chater Road Central

Hong Kong

T +852 2843 2394

F +852 2103 5122

Houston

Bill Hart Jr.

Partner

[email protected]

700 Louisiana Street

Suite 3400Houston, TX 77002-2730

T +1 713 238 2603

F +1 713 238 4888

New York

John P. Berkery

Partner

jberkery@ mayerbrown.com

1675 Broadway

New York, NY 10019-5820

United States

T +1 212 506 2552

F +1 212 262 1910

London/Paris

Robert Flanigan

Partner

[email protected]

201 Bishopsgate 20 Avenue Hoche

London EC2M 3AF Paris 75008United Kingdom France

T +44 20 3130 3488 T +33 1 53 53 03 48

F +44 20 3130 8760 F +33 1 53 96 03 83



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