Thyssenkrupp backers improve €7.6bn debt terms after lenders balk
Fund managers had complained that proposed protections were the ‘worst ever seen’
The private equity groups behind the acquisition of Thyssenkrupp Elevators, Europe’s biggest leveraged buyout in a decade, have backed down in a stand-off with bond and loan investors, agreeing to tighten terms of the deal in lenders’ favour.
Advent and Cinven, the private equity firms buying the German liftmaker for €17.2bn, sparked an outcry from high-yield bond and leveraged loan fund managers last week over the proposed terms of €7.1bn of debt finance.
Several analysts and investors branded the deal’s protections for investors, known as covenants, as the “worst ever seen” on an LBO financing package, given the substantial freedom they gave the private equity owners to pile on extra debt and shift assets away from bondholders.
But Goldman Sachs, which is leading the financing, announced sweeping changes to these terms on Monday, detailing more than 25 covenants that would be strengthened or potential loopholes that would be closed.
At the same time, Thyssenkrupp Elevators is increasing the size of the bond and loan package sold to investors to €7.6bn on the back of €20bn of demand, according to one person with knowledge of the matter. That allows the group of banks that underwrote the deal to sell a €500m piece they had previously planned to hold on their balance sheets.
The euro-denominated secured and unsecured bonds are expected to offer a coupon of 4.5 to 4.75 per cent and 6.75 to 7 per cent respectively — lower borrowing costs than indicated last week.
Advent and Cinven declined to comment.
“Between giving way on covenants and price, they picked covenants,” one adviser said. “You can’t just throw in everything including the kitchen sink and not expect there to be a price for that.”
Covenants have become a battleground between private equity firms and investors in junk-rated debt in recent years. Fund managers have complained that protections that were once common have been steadily whittled away, as issuers have grown confident of selling relatively high-yielding debt without them.
Recently, spats have broken out as businesses have faced financial distress in the wake of the coronavirus crisis, with lenders arguing that controlling shareholders are abusing loopholes in debt documents to allow themselves more flexibility.
Thyssenkrupp Elevators’ original covenant package included a term that would have allowed the owners to move assets into a subsidiary out of the reach of bondholders — mirroring a controversial move by the US retailer J Crew, which in 2016 transferred intellectual property to a shell company. This term has now been removed.
In addition, a proposed method of calculating the amount of money the business’s owners could strip out in dividends has also been changed after investors complained it allowed Advent and Cinven to select which year’s earnings they used for their benefit.
“Whoever comes around next time and tries to syndicate with these terms will probably think twice,” said Shweta Rao, senior director at credit research firm Reorg. She welcomed the “pretty extensive” changes but added: “It's still not a tight covenant package; it’s just not as aggressive as it was before.”
Financial data company 9Fin, which specialises in analysing high-yield bond information, described the improvements as “material” and said that they removed a “significant number of the unprecedented elements” of the earlier deal.
US law firm Kirkland & Ellis, which is advising Thyssenkrupp Elevators on the debt deal, has made a name for itself by offering private equity sponsors the greatest flexibility possible from their bond and loan documentation. That has drawn the ire of debt investors.
Kirkland did not immediately reply to a request for comment.