High-yield investors successfully pushed Superior Industries to strip out a controversial clause in a debt sale on Thursday, marking a rare victory for bond buyers in their tussle with sellers over aggressive deal terms.
The clause would have allowed the US car parts maker’s “restricted subsidiaries” to make investments in “unrestricted subsidiaries” — which would pass value from entities that bondholders have control over to those outside of their reach.
The Financial Times reported on Wednesday that junk bond investors were pushing back against the clause — dubbing it a “black hole” and a “trapdoor”.
On Thursday, banks running the deal announced that the clause had been “deleted in its entirety” from the €250m eight-year bond’s documentation ahead of pricing.
“This is an important win for investors in Europe — not only because it eliminates a very significant risk of value loss for this specific credit but also more broadly,” said Sabrina Fox, co-head of European research at Covenant Review, a research firm that analyses bond and loan documents.
“It sends a message to the market that the investor community here is willing to work together and resist terms that are wholly unacceptable. Particularly in a market that is as precedent-reliant as Europe, the removal of this clause will benefit investors going forward as well.”
The clause is contentious as J Crew used the same carve-out to move intellectual property into a new shell company at the end of 2016.
It is now trying to raise new debt against this collateral through a bond exchange but is locked in a dispute with the lenders who originally had security over the intellectual property.
J Crew’s private equity owner TPG has also bought preferred equity in Superior Industries, making some investors even more wary of the clause’s initial inclusion.
It would be much more difficult for the car parts maker to strip out the majority of lenders’ value in one swoop, given that it has hard assets like factories and plants, rather than something intangible like intellectual property.
But investors were more concerned that the term’s inclusion in this deal could lead to it appearing in future bond sales from other companies.
While the clause has appeared in several US high-yield bond sales, this would have been the first time it crossed the Atlantic into a European deal.
“The impression I got was that it was only two or three guys that were really up in arms but that they were in for size, so had more clout,” said one fund manager, who did not participate in the deal.
Investors have found it increasingly difficult to push back against aggressive covenants in the high-yield bond market in recent months.
This is because while demand is strong for the product, supply has been relatively muted — with many riskier borrowers turning to the even more buoyant European leveraged loan market instead.
The European leveraged loan market has also seen an erosion of traditional protections.
Investors now widely accept “covenant-lite” loans, a once taboo product that does not include the maintenance covenants historically demanded by lenders to riskier companies.
Private equity firms have also started pushing loans with aggressive transfer language that places restrictions on which investors the debt can be sold to, hobbling lenders’ bargaining power in times of distress.
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