Top 10 Questions to Ask
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Top 10 Questions to Ask for Each New Investment
Grade Offering
The initial question for every offering should be: Is the protective language the same as the language in the Covenant White Paper? If not, how is it different?
Change of Control 1. What events constitute a Change of Control?
The definition should pick up: (1) the acquisition of a majority of the issuer’s voting stock, (2) a sale of substantially all the issuer’s assets, (3) a merger with another company where the issuer’s stockholders don’t own a majority of the stock after the deal is closed, (4) continuing board directors, and (5) a plan of liquidation. Prospective purchasers should also make specific inquiry as to the existence of any carveouts/exceptions to the listed change of control triggers and if so, the business rationale/justification for including them.
2. Is rating agency testimony required to connect the ratings downgrade and the Change of Control?
Does the covenant require that the rating agencies state that the reason for the downgrade was the change of control? Rating agencies may not be willing to make this connection. The White Paper’s model provision only requires that the downgrading occurs during a time period that straddles the Change of Control transaction.
3. What happens if a rating agency ceases to rate the bonds?
If the issuer has the right to replace a rating agency when coverage by the original agency is dropped, bondholders may be at risk because a new agency might not apply the same criteria as the original agency. The White Paper’s model provision treats bonds as being “below investment grade” unless two out of the three specified agencies maintain an investment grade rating on the bonds.
Step-Up Coupon 4. Is the step-up provision subject to a cap? Is there a fall-away provision if the bonds are upgraded beyond a specified level?
The value of the step-up feature is diminished if it is subject to a cap on the amount of the rate increase or if the protection goes away once the issuer achieves a certain rating. Subsequent downgrades can always occur after an upgrade.
5. What happens if a rating agency ceases to rate the bonds?
The White Paper’s model provision allows an issuer with ratings from three major rating agencies to lose coverage from one of the three agencies without consequence. Subsequent withdrawals of ratings are treated as a reduction in rating that triggers a coupon step-up.
Limitation on Liens and Priority Debt 6. Does the covenant only apply to “Restricted Subsidiaries” or “Principal Properties”?
To the extent the covenant only applies to Restricted Subsidiaries, Principal Properties or some other defined subset of entities or properties, you will want to know which entities/properties are actually covered by the covenant. Determining the scope of these definitions is important in order to determine what percentage of the issuer’s EBITDA and valuable assets is protected from claims of holders of priority debt. The disclosure will not always give you the answers to these questions. Don’t be af
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