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By Yoruk Bahceli
LONDON, June 9 (IFR) - Superior Industries' debut euro deal
offered another sign of growing investor push-back against
aggressive high-yield deal terms, with a US-style covenant
loophole that could enable key assets to be insulated from
creditors removed from the bond's documents.
The senior unsecured €250m eight non-call three note,
upsized by €10m from the originally planned €240m, priced at 6%,
the tight end of initial price talk at 6%-6.25%, but only after
the deal's covenant package was amended.
The notes initially included covenants that allow the
company's restricted subsidiaries to make investments in its
unrestricted subsidiaries, something which could have enabled
Superior Industries, an autoparts manufacturer, to insulate
assets from creditors. Those assets could also be used as
collateral to back new debt.
"They have a J Crew-style provision in the documents that
allows the company to siphon off key assets through unrestricted
subsidiaries," one investor said at the early stages of
US retailer J Crew transferred valuable intellectual
property into a Cayman Islands "unrestricted subsidiary" in
December last year. This allowed it to alter its debt and liens
covenants to the detriment of bondholders.
The possible inclusion of a similar provision in a European
deal for the first time raised the question of whether or not
bond terms are facing the risk of further erosion.
However, the controversial clause was then removed from the
notes' documents entirely.
A market source said the provision was not purposefully
included in the bond's documents but was carried over from a US
precedent that had been used to draft them.
TPG, J Crew's private equity owner, also holds preferred
equity in Superior Industries.
The source added that the term was ultimately removed to
keep investors happy, particularly given Superior Industries'
position as a debut issuer in the market.
The deal comes as another demonstration of increasing
resistance from investors against aggressive deal terms, which
have flourished of late in the supply-short high-yield market,
where buyers are crying out for deals.
Superior Industries follows bureau de change operator
Travelex, which was forced to sweeten the terms of its €360m
bond to convince investors in late April, tweaking an aggressive
covenant package, as well as extending call protection.
"Travelex, together with Superior Industries, to me shows a
change. There is a shift, putting more power, more negotiating
power, in investors' hands with regard to covenants when the
book isn't filling quickly enough," said Sabrina Fox, head of
European research at credit research firm Covenant Review.
However, with both Superior Industries and Travelex widely
seen as challenged credits, it remains to be seen whether or not
investors will be able to push back on less problematic names.
While Travelex's business model had come under fire for the
declining demand for currency exchange services, investors
questioned Superior Industries' first-quarter sales and the
state of the auto market.
Several investors said they were not focused on the deal's
A second investor said the primary issue was the company's
weak prospects for cashflow generation and leverage level,
rather than the covenants.
"The covenants are something that would put us off if we
liked the credit. The first thing we do is decide if we like the
credit, then we go into the covenants. The covenants are not
make or break for me," he said.
Another investor said the covenants did not affect his
fund's decision, given the small amount purchased and a rare
juicy yield on offer.
"People should have been furious," the first investor said.
"The risk with controversial deals from a credit perspective is
that people don't like the credit from the beginning and don't
read the prospectus. That's what makes it so difficult to push
Fox added that timing has been playing a key role in
limiting investor ability to push back on deal terms, with
accounts often having no more than a day or two to review a
transaction between announcement and pricing and getting to
grips with the terms on offer.
Drive-by trades, where a deal prices on the day of its
announcement, have also not been uncommon in the high-yield
market of late. The most recent issuers to go down such a route
have been UPC and Ardagh.
Some drive-by deals follow non-deal roadshows, where issuers
are supposed to hold discussions with investors without
marketing a transaction.
"I do wonder whether it (non-deal roadshows) will become
more of a theme if banks and law firms keep seeing the
push-back," Fox said.
"Is it going to be a way of them avoiding making changes
once the deal comes out, because they've already filled the book
before the prospectus has been distributed?"
With European interest rates eventually bound to rise,
several bankers told IFR they are pushing issuers to come to the
market and lock in cheap rates while they can.
Against that backdrop, companies are likely to remain keen
to close deals as soon as possible.
Despite the trade's challenging nature, market reaction to
Superior Industries' deal was positive, with the note trading up
to a bid price of 101.540 to yield 5.722% less than a day after
it priced, according to Tradeweb data.
Proceeds from the bond will be used to refinance the bridge
loan Superior Industries took out to acquire Germany-based
automotive parts company Uniwheels.
JP Morgan (B&D), Citigroup, RBC and Deutsche Bank managed
(Reporting by Yoruk Bahceli; editing by Philip Wright, Sudip