Advanced Negotiation Issues In Financial Covenants

Transcription

1 Advanced Negotiation Issues In Financial Covenants An in-depth analysis of financial covenants used in leveraged and real estate loans This course is presented in London on: 18 January 2019, 1 July 2019, 19 November 2019 This course can also be presented in-house for your company or via live on-line webinar The Banking and Corporate Finance Training Specialist

2 Course Objectives Participants will: Be introduced to the interaction of capital structure & financial covenants Master the key financial ratios used by lenders and appreciate typical LMA ratios Have explained to them the key elements of the ratios per LMA and market approach Work through calculations of EBITDA and cash flow and learn about factors that can affect the numbers Get to grips Course with Overview the issues influencing the calculation of debt for the purpose of financial covenants Gain an understanding of the current market trends affecting EBITDA Review the problem areas in finance and operating leases Master the correct application of financial covenants and the use of equity cures Be taught about the covenants that are used in real estate deals Learn about the draft ECB Guidance on Leveraged Transactions Course Content Introduction - Interaction of capital structure & financial covenants Types of instruments & impact on the financial covenants What is the purpose of financial covenants Relevance of Capital Structure on Financial Covenants Bullet loans Impact of PIK How the lenders and borrowers approach setting the Financial Covenants Key financial ratios used by Lenders and typical LMA ratios in leveraged deals Market based financial ratios The four LMA covenants in leveraged deals Leverage ratios (Balance sheet and P&L ratios) Total Debt / EBITDA Senior Debt/ EBITDA Interest coverage ratios EBITDA / Total interest EBITDA / Senior Interest EBITDA / Cash interest [EBITDA Maintenance Capex] / Cash Interest [EBITDA Capex] / Cash Interest Cash flow cover (DSCR) CADS / Total Debt Service CADS / Senior Debt service Capex covenant LMA vs Market approach Carry forward / carry back amounts - LMA vs Market approach Add-backs LMA vs Market Calculation of EBITDA and Cash flow EBITDA Simplistic calculation of EBITDA Consistency of application (Accounting changes under IFRS, GAAP etc) Exceptional items LMA approach, UK GAAP vs IFRS

3 Discontinued Operations LMA, different approaches of UK GAAP vs IFRS Derivative & Financial Instruments - UK GAAP vs IFRS Pension Items - UK GAAP vs IFRS Current trends affacting EBITDA (aggressive add-backs) Anticipated synergies and cost reductions What are the typical requirments for anticipated synergies Business optimisation expenses Run-rate EBITDA how is this calculated Definition of Cash flow Typical adjustments Sponsor friendly adjustments Potential problems with cash-flow Calculation of Debt and Borrowings and Finance Charges Total [Net] Debt and Senior Total [Net] Debt Borrowings per the LMA Simplistic calculation of Net Debt Example of net debt items Treatment of PE Debt Vendor Loans do they matter Impact of Debt Buybacks and impact on Debt Treatment of trapped cash on Debt What does senior only exclude? What about PIK loans should they be included in Total Debt? Borrowings Treatment of receivables Redeemable shares Sweeper clause Finance charges & Net Finance Charges Impact of PIK Hedging impact Finance Leases v Operating Leases problem areas Current approach Impact of proposed changes to IFRS Which sectors will be affected by the changes Potential problem areas (& solutions) with the new regime Sectors posing particular problems with operating leases Current market trends Key differences between large vs mid cap vs smaller deals Cov-loose Use and application Typical ratios Cov-lite Use and application Typical ratios Springing Leverage covenants When should the ratio spring

4 Calculating the constituents of the covenants When is the covenant tested Potential problem areas Application and compliance with the Financial Covenants How many covenants are needed Which companies should be included Definition of Group Adjusted EBITDA (effect of acquisitions & disposals) Dealing with short periods (i.e. less than 12 months post the deal) Periods shorter than 12 months Typical pitfalls to avoid Frequency of application: When should the ratios be tested Historic TTM/LTM, forecast, both (quarterly, monthly) 2 options per LMA What level of Headroom is appropriate What s market When and why does headroom matter Impact of Clean-ups The Compliance Certificate Typical requirements per LMA Sch 9 Current commercial requirements Traps for borrowers When does the breach occur Ramifications of the breach for Lender (traps to avoid) Equity cures Equity cures - What are they, good or bad What should be cured (EBITDA, Cashflow, Debt) Treatment of overcures Is the cure EBITDA? And if yes what effect will this have How should the cash be used? (Why repayment of debt is not appropriate) Deemed cures what are they and are they worth having? Review of recent lessons from Ideal Standard Covenants used in Real Estate deals The LMA financial covenants Interest cover constituents, pros and cons Historical Projected Key differences from the leveraged ratio Calculation periods Passing Rental what is included and what is excluded Difficult / contentious aspects - break clauses, non-rental income, costs/expenses Finance costs treatment of hedging Loan to Value Constituents, pros and cons Items to be netted off Impact of the Financial Covenants on other aspects of the loan facility

5 Aspects of the loan affected by Leverage test Margin ratchets Cash sweeps Debt incurrence (Incremental/Accordion facilities) Aspects of the loan affected by the defintion of EBITDA Material subsidiaries and their relvance Guarantor coverage test Impact and relevance on Grower, Scalable and Builder baskets Key differences Impact on and relevance to the loan facility Draft ECB Guidance on Leveraged Transactions Which lenders are affected Which deals are affected EBITDA calculation Ramifications for market players Appendices (Not covered in the course but included in an appendix the materials) Overview of ratios used in Project finance / Infrastructure Annual Debt Service Coverage ratio ( ADSCR ) Loan/Bond Life cover Project Life cover Using the Buffer test Background of the Trainer The trainer is a consultant, public speaker and author. He provides training programmes globally to a blue-chip client base on private equity, debt finance, loan documentation and restructuring. He is a senior consultant with Debt Xplained, with Grant Thornton UK (Debt Advisory) and is also a Senior Advisor to KPMG Finland. He has spoken at conferences in the UK, Europe, Australasia & South Africa. He provides training to a wide range of clients on a bespoke in-house basis & publicly through Redcliffe Training Associates. Additionally, he is the Programme Director for the infrastructure/project finance module for the MBA programme at the Cass Business School in London. Course Summary The loan market in Europe has bifurcated into two main approaches to loan documentation; smaller club and bilateral deals on the one hand, which broadly follow the more lenderfriendly LMA approach, and larger syndicated TLB-style deals on the other hand which are increasingly influenced by high yield bonds and invariably are structured on a cov-loose or cov-lite basis. These larger deals also include a far more eclectic approach to the key definitions comprising the ratios with many add-backs taken copied from high yield bonds. This programme covers financial covenants in leveraged loans and real estate deals and includes specific reference and analysis of the covenants, terms and definitions in the LMA Senior Facilities Agreement for Leveraged transactions and LMA Real Estate precedents. The programme uses information from the Debt Explained database, to review the current trends in the market in the larger syndicated (TLB-style) deals which so often include springing leverage covenants and high-yield-bond style covenant packages. The larger syndicated TLBs also enquiries@redcliffetraining.co.uk vary in approach depending on whether +44 (0)20 they 7387 apply 4484 English law or NY law (for example, the latter do not usually permit overcures or require

6 prepayment of loans from equity cure cash). Direct lenders, which typically use the LMA leverage precedent as a starting point, also tend to adopt a more borrower-friendly approach to the terms in the loan and the financial covenants. Financial covenants are arguably one of the most heavily negotiated aspects of the Loan Agreement. Too often; some parties fail to understand the key negotiating issues that really matter, for example they view the financial covenants in isolation rather than appreciating that they must be seen in the context of the particular capital structure. Secondly, too much time is spent on which covenants apply rather than focusing on the key constituents of the key terms in the financial covenant. Finally, many parties fail to appreciate that, even in cov-lite deals, the financial covenants and/or the components of those covenants play an important role as they also affect a wide range of other critical matters in the loan. This usually includes the various permitted actions such as debt incurrence (security and guarantees), sponsor payments, cash sweeps, guarantor coverage and grower, scalable and/or builder baskets where these appear. This course provides a detailed look at commercial aspects of financial covenants and looks under the bonnet at the critical issues that arise in practice. It provides an in-depth look at the covenants as set out in the Loan Market Association precedent together with other covenants that might be used in practice. Reference is made to the Debt Explained loan database which tracks key terms in the larger syndicated TLB market. Participants will gain an in-depth view of which covenants should be used together with a detailed analysis of the constituents of the covenants and the sponsor friendly add-backs and other sponsor friendly techniques used by borrowers to manipulate the covenants. The programme will appeal to practitioners involved in leverage, real estate and infrastructure, such as Lawyers, Private Equity professionals, Bankers in Lending (all departments), Corporate financiers, M&A advisors, Debt advisory and Restructuring. Accounting professionals looking to expand their knowledge of this topic will also benefit as many of the issues embrace legal /documentary considerations. The programme adopts a pan-european approach to the topic but the presenter is able to discuss issues relevant in the USA in view of his exposure to those markets. To derive full benefit from the programme, it is essential that attendees have a basic understanding of the main / headline elements of a Profit and Loss account (Sales, EBITDA, EBIT etc) and a basic understanding of the differences between P&L /Accrual Accounting and Cash accounting. It is emphasised that participants DO NOT require an understanding of IFRS or GAAP. A short module summarising the key differences between P&L /Accrual Accounting and Cash Accounting is available on request prior to the programme. The programme will review the draft ECB guidance on leveraged transactions published in November The course will examine which type of transactions are covered, which lenders are affected, the approach to EBITDA and the potential implications for players in the debt markets.

7 Case Study: Participants will be required to:- (a) calculate how to derive the key elements of the various covenants (b) identify some of the more problematic components in the covenants (c) calculate the various covenants and (d) explain the pros and cons of each of the covenants and why they may be appropriate for one deal but not another. The calculations are relatively simple and are designed to explain the basic principles and reinforce learning. What Redcliffe s clients are saying about this course: Lots of anecdotal examples -- Associate, A&L Goodbody Knowledgeable Trainer -- Leveraged Capital Markets, Rabobank Presenter was very knowledgeable. Broad focus of course -- Senior Associate, Pinsent Masons

8 09:00-17:00 London Standard Price: 725 +VAT Membership Price: VAT In-House Training Delivering this course in-house for a number of participants could be very cost effective. The venue and timing can be agreed to suit the client, as well as the selection of the trainer and the precise contents of the seminar. Tailored Learning All of our training courses can be tailored to suit your company s exact training needs. We will work closely with you to help develop a training programme with content that is unique for your organisation. Please us on enquiries@redcliffetraining.co.uk for more information E-Learning This course can also be presented as a bespoke e-learning programme created by you to fit your exact requirements.