Actionable Ideas for Companies and Sponsors

Issuing High Yield Bonds with Special IPO Redemption Features

Traditional high-yield bond structures include non-call periods for the first two or three years with very limited exceptions for issuers to redeem bonds during these periods. One common exception in high-yield bonds is the equity clawback that allows issuers to redeem up to 35% of the issue at price of par plus the coupon. This provision can be limiting and expensive, as it only allows a portion of the issue to be redeemed and at a price higher than the first call period’s price. As a result, high-yield bonds have not been a choice for issuers planning a near term equity issuance.

Recently, The AZEK Company, with Jefferies as joint bookrunner, completed a bond refinancing that included a special equity redemption clause during the first two years that allowed AZEK to redeem 100% of the bonds at a premium during the first two years with proceeds from an IPO. This optionality allowed AZEK to refinance an upcoming maturity without limiting their options for going public, and AZEK subsequently completed its IPO on June 16.  Given the strength of the IPO market, we believe special equity redemption features will become a more common feature in high yield bond offerings, allowing issuers to take advantage of the strength of the high yield bond market, while preserving their ability to go public in the near term.