Actionable Ideas for Companies and Sponsors

Shift to Secured Bonds When Ratings Impact Loan Investor Demand

Below the corporate family rating of B3 with Stable outlook, the majority of 1st lien term loan demand typically falls away, resulting in unacceptable outsized yield levels for issuers. In addition, at these rating levels for smaller issuers, maintenance covenants are typically required by loan investors, which also is unattractive to a large subset of issuers. Recently we have seen several instances of companies working around these market constraints by shifting their financings to Senior Secured Notes. By moving to the high yield bond market, issuers can access a much deeper investor base that is not hampered by strict ratings constraints and can avoid maintenance covenants. We recently saw this shift to work around credit ratings during the $7.3 billion financing of Avantor’s acquisition of VWR Corp. when Avantor downsized their term loans and shifted to $1.5 billion 7-year Secured Notes and €500 million of 7-year Secured Notes. We also saw this shift at FXI Holdings, which launched Senior Secured Notes to avoid potential term-loan maintenance covenants. Jefferies was lead left bookrunner on the FXI Holdings financing and a bookrunner on the Avantor financing.