BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. IFLR Indonesia Forum: Debt Capital Markets Alexander Lloyd, Partner, Sidley Austin LLP Gerard Hekker, Counsel, Sidley Austin LLP October 18, 2012 Contents Preliminary Considerations Critical High Yield Covenants Common Issues 2 1
Debt Deals Preliminary Considerations 144A/Reg S vs Reg S Scope of disclosure and liability 10b-5 statements/opinions Comfort letters 3 Debt Deals Preliminary Considerations (cont d) Underwriting/Purchase Agreement is an agreement by underwriters signed at pricing to purchase securities at close (which they immediately resell to investors) Representations and warranties (serve both a liability and diligence function) and covenants Market outs often heavily negotiated Closing conditions/deliverables Indemnification (in Asia, US vs English style of indemnification is sometimes an issue) 4 2
Debt Deals Preliminary Considerations (cont d) Staleness of financial statements/135 day rule Publicity considerations/jobs Act Section 201(a)(2) of the JOBS Act requires the SEC to revise Rule 144A to provide that securities sold under Rule 144A may be offered to persons other than qualified institutional buyers (QIBs), including by means of general solicitation or general advertising, provided that securities are only sold to persons reasonably believed to be QIBs. However, the ABA Federal Regulation of Securities Committee has sought additional clarity on whether such activities would jeopardize the registration exemptions for (i) the issuer s sale of securities to the initial purchasers under Section 4(2) of the 33 Act (redesignated Section 4(a)(2) by the JOBS Act) that always precedes a 144A resale transaction or (ii) Regulation S sales to outside the United States, which currently prohibit directed selling efforts. Although the statutory intent seems clear, the relief provided to general solicitations and general advertising under Rule 144A transactions is of limited use if such activities violate 4(2)/4(a)(2) or Reg S transactions. 5 Why do Bond Investors Need Covenants? Covenants protect bondholders against a diminution in value of their investment as a result of: Credit deterioration Loss of equity cushion Loss of control over assets Loss of ranking position Covenants can lead to credit improvement which increases the chance the bonds will trade above par 6 3
Noteholders pari passu Other Creditors guarantees The Box (simplified model; disregards issuing structure) Parent ( inside the Box ) Other Creditors Joint Ventures (JVs) (50% of voting stock or less) Restricted Subsidiaries ( inside the Box ) Unrestricted Subsidiaries 7 Restricted Group The Parent and its Restricted Subsidiaries (the entities inside the box ) are subject to the high-yield covenants Although Unrestricted Subsidiaries and minority-owned JVs ( outside the box ) are free from covenant restrictions, and the interest expense of "outside the Box" companies does not count towards the Fixed Charges of the Restricted Group under the debt ratio test: Equity accounted revenue from "outside the Box" companies are not credited to the Restricted Group for purposes of financial covenants, except to the extent paid in cash Investments (including loans, guarantees and equity investments) by the Restricted Group in "outside the Box" companies can only be made if sufficient amounts are available in the Restricted Payments basket, and any such investments reduce the basket available for dividends and other Restricted Payments Transactions between the Restricted Group and "outside the Box" companies are generally subject to the Affiliate Transactions covenant (discussed below) 8 4
Highly Negotiated Covenants Each deal is different, but in every deal the two most important covenants are Debt incurrence Restricted payments Other covenants are less crucial, but also important. The other covenants typically include Change of Control Affiliate transactions Mergers Asset sales Liens Reporting Dividend stoppers at subsidiaries Limitation on Sales of Capital Stock of Restricted Subsidiaries Business activities; and All of these covenants are incurrence tests 9 Limitation on Indebtedness and Preferred Stock Purpose: to prevent the Restricted Group from becoming excessively leveraged. The covenant seeks to ensure sufficient cash flow to meet all debt obligations and prohibits the Parent and Restricted Subsidiaries from incurring Indebtedness or, in the case of Restricted Subsidiaries, issuing preferred stock, unless either A ratio test is met, or A Permitted Debt basket is granted There are two typical ratio tests Fixed Charge Coverage Ratio (most common) (EBITDA/Interest Expense) Typically 2.0x 3.5x May ratchet up over time to allow flexibility to borrow at issue of notes Leverage Ratio (uncommon) (Debt/EBITDA) Typically around 5.0x - 6.0x Most often seen with media and telecom companies Purpose of the ratio test is to allow the Company to incur more debt as the credit improves The ratio tests utilise the Company s EBITDA over the last four quarters Results are adjusted so that they are a more meaningful yardstick for measuring the Company s ability to service more debt in the future giving pro forma effect to incurrence of debt during the LTM period and acquisitions and dispositions of assets. 10 5
Ratio Debt Parent and Subsidiary Guarantors can incur Indebtedness if such incurrence would not cause the Restricted Group to fall below the Fixed Charge Coverage Ratio ( FCCR ) on a pro forma basis Ratio debt usually can typically only be incurred by Parent and Subsidiary Guarantors, but not nonguarantor Restricted Subsidiaries, due to structural subordination issues Fixed Charge Coverage Ratio: indicates the borrower s ability to satisfy fixed financing requirements, such as interest or lease payments, based on the ratio of cash flows to interest expense 11 Permitted Indebtedness Permitted Indebtedness can be incurred even when ratio debt under the FCCR test described above is not permitted Generally limited to well-specified baskets (sometimes subject to dollar caps) without which the business could not function and certain other customary carve-outs However, interest expense under Permitted Indebtedness still counts as debt, and affects the calculation of Fixed Charges for purposes of the FCCR Typical Permitted Indebtedness baskets might include, among other categories of debt: Existing debt at the time of the offering The Notes and Subsidiary Guarantees Indebtedness between or among the Company and Restricted Subsidiaries Permitted Refinancing Indebtedness Capped baskets under credit facilities, purchase money obligations, etc. Sometimes, and subject to dollar caps, a general basket, which can serve as a limited protection against inadvertent or unavoidable incurrences of debt 12 6
Limitation on Restricted Payments The purpose of this covenant is to protect bondholders access to value by limiting payments or asset transfers outside the Restricted Group, such as Dividends/repurchases of equity Retiring debt that is subordinate to the bonds before retiring the bonds Investments in entities that are not Restricted Subsidiaries Restricted Group Company 40% Restricted Subsidiary Restricted Subsidiary J.V. 60% Third Party Investor 13 Restricted Payments The basic test prohibits all of these payments and asset transfers (known as Restricted Payments ) unless Available Restricted Payments Basket: aggregate Restricted Payments are less than 50% of Consolidated Net Income since the closing of the high yield deal plus new equity plus amount of reduction of debt on balance sheet resulting from conversion of convertible bonds plus liquidated Investments for cash, plus a general basket (sometimes); and Company could incur $1 of additional debt at time of making the payment i.e., Fixed Charge Coverage test is met; and No default has occurred and is continuing Customary exceptions include Permitting limited repurchases of management equity in connection with stock option plans Permitting new equity proceeds to immediately flow back out and repurchase old equity or to make a restricted investment 14 7
Limitation on Liens No Liens on assets of the Company or any RS, other than Permitted Liens Permitted Liens often include Liens to secure Purchase Money Indebtedness Increasingly in secured deals, Permitted Liens include Liens securing Permitted Pari Passu Secured Indebtedness, allowing for new issuance of pari passu secured debt (e.g., new notes or new CBs, subject to compliance with the Limitation on Indebtedness covenant and other restrictions on the new debt) 15 Change of Control Within 30 days after the occurrence of a Change of Control, the Company is required to make an offer to purchase all outstanding Notes at a price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest. Change of Control is defined to mean: the sale of all or substantially all of the assets of the Company and Restricted Subsidiaries to any person (defined to include persons acting in partnership a syndicate or any other group) other than the Permitted Holders (the controlling shareholder and certain affiliates); merger into another company, except where the voting stock of the company is exchanged for a majority of the voting stock of the new entity; 16 8
Change of Control the Permitted Holders are collectively the beneficial owners of less than [50/40/30]% of the voting shares of the Company; any person or group acquires a greater voting percentage than the Permitted Holders; board members who constituted the Board on the Original Issue Date, together with any new directors whose election was approved by a vote of at least two-thirds of the directors then still in office cease to constitute a majority of the Board; and the adoption of any plan of liquidation or dissolution of the Company. 17 Common Issues Security/Collateral Secured versus unsecured transactions An increasing number of transactions in Indonesia are secured Distinction between collateral exclusively for the benefit of noteholders, and collateral that can be shared Interest reserve accounts, share pledges in SPVs and interests in intercompany loans are often exclusively available to noteholders Other collateral is often subject to sharing with future incurrences of Permitted Pari Passu Secured Indebtedness PPPSI collateral often has limited value to future non-capital markets creditors 18 9
Common Issues Joint Ventures A joint venture in which the parent and its other subsidiaries own 50% or less of the voting rights is outside the box Even majority owned joint ventures will sometimes be outside the box because of contractual or other restrictions (debt covenants or shareholders agreements), or the objections of minority shareholders Exclusion of a joint venture from the restricted group can have significant credit implications, since such a JV would not be covered by the covenants or included in the credit analysis for ratings or pricing purposes 19 Common Issues Joint Ventures Exclusion of a JV from the restricted group would have the following consequences: the EBITDA of the JV would be excluded when calculating the financial ratios, except to the extent that dividends are paid in cash; any loans from the restricted group to, guarantees on behalf of, or equity or other investment in the JV would be limited by the Restricted Payments covenant, and would reduce the restricted group s ability to make other Restricted Payments, such as dividends to its public shareholders; transactions with the JV would be subject to the transactions with affiliates covenant While it may be possible to provide carve outs for these in the covenants, such carve outs would also likely affect the credit, since the carve outs would allow for significant leakage out of the restricted group to a third party 20 10
Common Issues Joint Ventures Even for majority owned joint venture, minority shareholders may object to guaranteeing the high-yield bonds, raising issues of structural subordination Furthermore, minority investors may be entitled to certain veto rights or other minority protections, which rights could limit the ability of the JV to pay dividends, make loans or transfer assets to members of the restricted group, limiting the ability of the restricted group to service the high-yield debt The JVs status as a non-wholly owned subsidiary also has credit and covenant implications. From a credit perspective, the restricted group would no longer have 100% of the equity accounted income and EBITDA of the JV. From a covenant perspective, among other things, the restricted group would no longer have 100% of the JV s EBITDA, which would reduce the restricted group s ability to take certain action, such as incurring debt and making restricted payments (such as dividends). 21 Common Issues Joint Ventures The Asset Sale requirements that consideration for asset sales be received at the time of the sale and that 75-85% of the consideration be in cash or cash equivalents may limit the ability of the restricted group to contribute assets to a JV in exchange for equity interests Parent sometimes proposes carveout from the definition of Asset Sale for the right to contribute assets to a JV if the Parent is able to make an Investment for that amount under the Restricted Payments covenant or the definition of Permitted Investments Even if a contribution of assets is contemplated under Permitted Investments, the asset sale consideration issue must be addressed separately Carveouts for affiliate transactions are frequently limited to wholly owned restricted subsidiaries or certain transactions in cash or capital stock, so asset contributions to JVs would likely be subject to this test 22 Limiting the box to wholly owned subsidiaries is arguably unnecessary if the minority shareholders of JV are not affiliates of the Parent 11
Common Issues Joint Ventures Questions? 23 Common Issues Joint Ventures Thank you 24 12
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