Debt investors let borrowers look to the future


Companies whose revenues are plummeting due to Covid-19 are looking to avoid possible debt defaults by substituting last year’s profits for this year’s profits in the documents they present to their lenders.

British pub chain Punch Taverns, US event group Live Nation Entertainment and Samsonite, the Hong Kong-listed luggage maker, are among the companies using the tactic, according to documents and people familiar with the movements. The strategy is tantamount to asking lenders to imagine that the pandemic had not happened, but debt holders have so far accepted it because acknowledging depressed 2020 earnings could cause problems on both sides.

“Conceptually, that doesn’t suit me; it doesn’t make sense, ”said one Punch bondholder. “But I have no incentive to fight the business and push [it] on a messy path.

When companies breach covenants known as covenants, such as the obligation to meet certain debt-to-earnings ratios, lenders are normally free to demand immediate repayment or, in extreme cases, to trigger restructuring and to take control of the company’s assets.

But lenders’ acceptance of old earnings figures is a sign that they are withholding such drastic measures and instead giving companies time to recover from events over which they have no control.

“Bondholders are prepared to accept these changes because they are temporary and because they can see a way through it,” said Thomas Leys, investment manager at Aberdeen Standard Investments.

He added that forcing default after a triggered commitment could leave lenders with hard-to-offload assets. “Getting a bunch of ads and trying to sell them is unthinkable in this environment,” he said.

Using historical numbers is the latest move by cash-strapped businesses to flatter their books. Some have started publishing estimates of how much profit would have been made had the virus outbreak not occurred, and called it “ebitdac” – earnings before interest, taxes, depreciation, amortization and coronavirus.

The trend has pissed off some investors, who fear it will allow companies to escape restrictions on how much they can borrow. European markets regulator Esma warned last month that companies should not add estimates of lost revenue, saying that this “would not fairly present the overall financial performance of issuers”.

Bondholder Punch said these developments are a disturbing sign of a “new era of adjustment,” in which companies routinely ignore costs they see as one-time or one-off.

Punch, which operates around 1,300 UK pubs and is owned by European private equity firms Patron Capital and May Capital, last month asked bondholders to allow it to use the year’s ebitda figures last instead of this year for the period in which the pubs were forced to close. , said two people familiar with the details.

Beverly Hills-based Live Nation Entertainment, which operates the Reading, Leeds and Lollapalooza music festivals, announced in April that it would suspend commitments for the next few months and then use 2019 profit figures to calculate its net commitment to debt from the fourth quarter of 2020 until the second quarter of 2021.

“It’s not very common to replace past ebitda,” a loan holder told Live Nation. The investor said if the current earnings figures were used, the entertainment company would not be able to access its revolving credit facility, which would put it in a worse position.

A spokesperson for Live Nation said the change “will allow us the flexibility to run our business during the disruptions it is experiencing this year.”

When presenting its first quarter results last month, Samsonite made proposals to use 2019 instead of the 2020-2021 ebitda figures in its covenant calculations ranging from September 2021 to March 2022.

Samsonite did not respond to requests for comment. Punch declined to comment.

Patricia Lynch, a partner at Ropes & Gray law firm, said while past earnings don’t accurately reflect the post-pandemic world, giving companies time to see how things are going isn’t a bad idea, given that Covid-19 will likely have ‘longer term effects on consumer behavior’.

“If the commitments are tested with a real real ebitda and [companies don’t] get a waiver, then they would default, ”said Shweta Rao, senior director of credit research firm Reorg. “It is generally in the interest of bondholders and creditors not to enter a restructuring scenario.”

But others warn that if many more borrowers try to pass historical numbers off as current, lenders might be less flexible next time around.

“If companies are able to get interpretations of restrictive covenants. . . lenders could rethink how covenants work in the future, ”said Trevor Piper, senior credit manager at Moody’s rating agency.


Carol M. Barragan

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