(Bloomberg) -- Loose bond documentation that flourished in the easy-money era has left investors vulnerable to asset stripping in recent debt deals. Now they’re fighting back.
In the past week alone, two junk borrowers — Italian luxury supplier Rino Mastrotto and Vodafone Spain — have included stricter provisions in documentation for new bonds that restrict their ability to move assets out of reach of creditors. Clauses in both cases were focused on payments to so-called “unrestricted subsidiaries,” or entities that are not bound by the covenants of a debt agreement.
The provisions — both novelties in the European leveraged finance space — come in response to investor fears of losing access to collateral after a series of troubled European companies unleashed creditor-unfriendly moves to shore up their finances, according to people familiar with the matter, who spoke to Bloomberg on the condition of anonymity.
Shifting assets into unrestricted subsidiaries has become increasingly common as borrowers look to exploit loose debt documentation. Once the assets are moved outside the restricted group, they can be used as collateral to raise more funds. Meanwhile, existing creditors see the value of their own collateral shrink.
In response to a request for comment about the bond documents, Rino Mastrotto Chief Executive Officer Matteo Mastrotto said that investors’ interest in the deal “confirms the strength of our business model.” A spokesperson for Zegona, which owns Vodafone Spain, didn’t immediately respond to a similar request.
Altice Ordeal
In May, struggling French telecommunications group Altice France spooked creditors when it designated a series of subsidiaries as unrestricted, Bloomberg reported. Traders and investors were left scrambling to figure out what assets — if any — were held by the new unrestricted units.
The move prompted creditors to renew calls for legal protections that largely got written out of junk-bond deals when interest rates were at historic lows. Until now, efforts had largely focused on adding so-called J Crew blockers to new deals. Such clauses aim to prohibit the transfer of intellectual property away from the legal claims of existing lenders.
But since the Altice ordeal, investors have been looking into ways to shore up their protections even further.
Vodafone Spain added a more robust version of a J Crew blocker to its €1.3 billion ($1.4 billion) leveraged loan, with a clause that prevents the transfer of “material assets” to unrestricted subsidiaries. The company sold the debt to raise money for its buyout by Zegona Communications and used the blocker to make the deal more attractive during the syndication process. The company also limited its ability to make equity distributions to unrestricted subsidiaries.
Rino Mastrotto went even further, placing a cap on payments to unrestricted subsidiaries for its €320 million of floating-rate notes, according to an offering memorandum seen by Bloomberg News. The clause states that investments in unrestricted subsidiaries cannot be bigger than €15 million or 20% of earnings before interest expense, taxes, depreciation and amortization.
The proceeds of the debt raise will be used to repay existing liabilities and to fund a €124 million dividend to shareholders, the offering memorandum said. The provision was discussed and later integrated into the deal following a period of pre-marketing with selected investors, according to a person familiar with the matter.
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