NEW YORK (IFR) - A credit research firm is urging investors to push back on the terms of a high-yield bond that will help finance Blackstone’s acquisition of Refinitiv, the Financial and Risk division of Thomson Reuters.
Covenant Review said in a report on Friday that the bond had some of the weakest investor protections seen since the financial crisis, and could lead to copy-cat deals from other private equity firms if the buyside does not fight back.
“It’s not just that Blackstone might be able to do this on the biggest buyout since the financial crisis. It’s also that it is trying to do so when we are so late in the credit cycle,” Scott Josefsberg, an analyst at Covenant Review, told IFR.
“If Blackstone pulls it off, the worry is that every sponsor will try to push aggressive terms.”
Covenant Review said the junk bonds had extremely defective sponsor-style covenants, riddled with flaws and loopholes that reflect the worst excesses of covenant erosion over the last two years.
The US$5.5bn Refinitiv bond was announced earlier this week as part of a bigger US$13.5bn debt package that includes leveraged loans.
It is the largest buyout financing since the financial crisis and a major test of the leveraged finance markets on both sides of the Atlantic.
The financing backs private equity firm Blackstone’s purchase of a 55% stake in TR’s financial data and technology division (which includes IFR). The acquisition is expected to close on October 1.
“The banks have a massive book of orders to fill,” Covenant Review said in a note sent to the market on Friday.
“We urge investors to leverage the momentum achieved over the last several months to resist these unreasonable provisions and insist on stronger covenants that will safeguard creditors and the market as a whole.”
One concern is a clause that would give Blackstone unprecedented flexibility to move assets to unrestricted subsidiaries if the business ran into financial difficulties.
There are standard provisions in high-yield bonds that limit the ability of a financial sponsor to pay itself dividends from cash that accumulates in the restricted payments basket.
Typically, an issuer cannot pay dividends out of its accumulated restricted payments basket if it is in default, and its earnings must be at least double that of its interest expenses.
The latter is also known in the industry as the $1 of ratio debt.
“It is supposed to serve as a proxy for a company’s financial health, but Blackstone is looking to eliminate that completely,” said Josefsberg.
“It would facilitate its ability to shuffle assets around and shift them to the sponsor in a distressed situation, and move them away from creditors at a time when investors would want to keep as many assets as possible.”
Covenant Review called the provision “wildly off-market” in its note.
“It would allow the company to use basket build-up capacity for any purpose even if it could not meet a basic measure of financial health - the ability to incur $1 of ratio debt pro forma,” it said.
“This is worse than we’ve seen in other recent sponsor deals, which at least require the issuer to meet this test in order to pay dividends to equity or repurchase equity.”
In addition, Blackstone has included terms that would enable it to keep the bonds in place if it were to sell the business.
This kind of flexibility - known as portability - appears in European junk bonds, but is rare in the US high-yield market.
Josefsberg, however, called Blackstone’s version of the portability feature “extreme”.
A certain leverage ratio typically needs to be satisfied in order for the bonds to be kept in place. But Blackstone has flexibility to calculate the leverage ratio as of the date when both parties agree to the sale rather than when the deal is closed, Josefsberg said.
“The concern would be if the company performance declines during that time,” he said.
Covenant Review also slammed what it called excessively liberal proforma adjustments to earnings definitions, “the continuing sponsor trend of inflating EBITDA to nonsensical levels.”
An investor roadshow for the Refinitiv bonds began on September 5 and will continue next week in both Europe and the US. The bond is not expected to price until September 18.
It remains to be seen how investors react to Covenant Review’s risk assessment, but of late investors have had success in forcing issuers to change covenants.
Just last month, private equity firm KKR made its covenants less issuer friendly on a buyout financing for IT operations management company BMC Software.
Reporting by Natalie Harrison; Editing by Shankar Ramakrishnan and Paul Kilby