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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 marketing.
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 covenants.
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 back.”
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 the trade. (Reporting by Yoruk Bahceli; editing by Philip Wright, Sudip Roy)