ThyssenKrupp backs down from aggressive LBO covenants

4 min read
EMEA
Eleanor Duncan

ThyssenKrupp Elevator has made substantial tweaks to the covenants for its leveraged buyout bond, making the deal much more investor-friendly.

The changes mean the bond is now far more in line with market precedent for large sponsor transactions, said analysts at high-yield analytics firm 9fin.

On Wednesday it launched its €4.05bn-equivalent bond section of the financing package for the €17.2bn buyout of its elevator business - one of the biggest LBOs in the past decade.

The company is also marketing a €3.05bn-equivalent loan for the buyout.

Analysts and investors last week slammed the legal terms of the bond that will help finance ThyssenKrupp Elevator's buyout by a private equity consortium led by Cinven and Advent, but sources close to the deal said investor demand was still very strong.

One source close to the deal said it was in very strong shape, and that it was debatable whether the covenant changes were necessary.

"[Leads] are just responding to what the market has asked for in order to optimise the success of the transaction," said the source.

The improvements are material and remove a significant number of the unprecedented elements of the deal, said 9fin analysts.

Sponsors have tightened covenants across the board, most notably with a stricter calculation of Ebitda, said one investor. In addition, the company has cut its capacity to use proceeds from asset sales and pay them out as dividends.

A second investor said the most material change was the deal's "restricted payments having a proper builder basket put in".

A builder basket grows if the issuer is profitable, allowing sponsors to pay themselves more in the way of dividends.

Previously, the deal would have allowed sponsors to pay themselves a dividend calculated as a percentage of Ebitda per year, regardless of the amount of profit they make, the second investor said.

ThyssenKrupp also made tweaks to the deal's structure.

In euros, ThyssenKrupp upsized its €750m seven-year non-call three senior secured to €1bn, cut its €1bn seven-year non-call one senior secured floating-rate note to €500m and left its €650m eight-year non-call three senior unchanged.

The dollar tranches are now flagged as a €1.5bn-equivalent seven-year non-call three senior secured, up from €1.25bn, and left unchanged its €400m-equivalent eight-year non-call three senior.

The first investor said he had heard whispers for the euro secureds at 4%-5%, and 7%-8% for the unsecured euro tranche.


CREDIT VS LEGALS

ThyssenKrupp's covenants in their previous form were described by some analysts last week as some of the weakest they had ever seen in the market.

High-yield investors have witnessed steady covenant erosion in sponsor-led bonds over the past decade, thanks to central bank market intervention which has the buy-side scrambling for income, said the first investor.

"We're between a rock and a hard place," he said. "It's been a long time since we've had a market that hasn't been propped up by central banks."

The first investor said the changes meant he would be taking a another look at the deal, after rejecting it the first time around.

Yield compression means that investors are always juggling the merits of a credit against how loose the legal terms are for the deal. But since the market slump since March they are more focused on their ability to recoup value from businesses if things go wrong.

"Covenants are a hugely important part of our investment thesis as they dictate how much a company is able to hurt bondholders with various transactions, [including] incurring debt, selling assets or removing cash from our group etc...," said the first investor.

"So ultimately it creates a higher hurdle for the fundamental story to get over," he said.

The three global coordinators and bookrunners for the bond are Barclays, Credit Suisse and Goldman Sachs. Barclays is B&D on the euro senior, Credit Suisse is B&D on the euro secureds and Goldman Sachs is B&D on the US dollar tranches.

Deutsche Bank, RBC and UBS are bookrunners.