Halliburton & Baker Hughes

Xtract Research Takes Aim at Poorly Structured Junk Bonds with New Notorious Award

Inaugural WHYBOTY (Worst High Yield Bond of the Year) Awards Name the HD Supply Waterworks bond “winner”

When it comes to worthless covenants that are hiding behind a façade of fairness, Xtract Research, a leading covenant research firm, has no qualms about calling out those bonds. In response to what the firm has called a banner year for worthless covenants, Xtract doled out several categories of awards to various companies that created dubious bonds as part of their inaugural WHYBOTY (Worst High Yield Bond of the Year) Awards.

“It’s no secret that covenant quality, the legal protections for high yield bond investors, travels in one direction and one direction only, but this year the race to the bottom was particularly fierce among top tier sponsors,” said Valerie Potenza, head of high yield research at Xtract.

The winning bond for 2017 was the HD Supply Waterworks bond, sponsored by CD&R. The bond allows general-purpose secured debt to be issued up to 16x EBITDA, as well as unlimited debt secured by the firm’s assets to purchase or improve something.

Runner ups for this year’s WHYBOTY include Staples, Inc., which could double dip on its capital contributions by supporting a 2x Contribution Debt that can be secured with no contributions and Excluded Contribution RPs that included “worst in class” RP blockers, per Xtract.

Ceasars Resort Collections was also an overall runner up but was able to take home its own Worst Permitted “Refinancing” Award. The notes allowed the issuer to incur refinancing indebtedness without repaying any debt. There is no timeframe for the actual refinancing, and the issuer only needs to “set aside” funds to refinance some debt at an undetermined time.

Potenza added, “This past year we saw top tier sponsors draft various loopholes into their document to provide their portfolio companies with more and more flexibility.  If these companies go into distress they will have more flexibility to incur secured debt, make dividends and move assets outside the reach of bondholders.”

While the WHYBOTY Academy has not codified criteria for the awards, it favors those that include covenants that pretend to provide protection to the casual reader; exceptions that renders a covenant as completely useless; and, include provisions that look innocuous but are in fact predatory.

 

Xtract Research provides covenant research reports aimed at traders, analysts and portfolio managers, providing analysis of covenant packages and capital structures. The firm, which is comprised of corporate finance lawyers based in New York and London, was founded in 2005.

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