Market Alert: A New CD&R Deal, Part 1 & 2

Part One: A New CD&R Deal Takes Unrestricted Subsidiary Drop-Down Capacity to a Nonsensical Extreme

Discover how CD&R’s latest carveout in the Shearer’s Notes could pose significant risks to high yield investors by allowing the diversion of assets to Unrestricted Subsidiaries under dubious conditions. This analysis is crucial for understanding the potential pitfalls in high yield covenants.

Part Two: CD&R Backs Off Nonsensical Drop-Down Capacity in Both the Shearer’s and Focus Financial Bonds

Find out how investor advocacy, alongside Covenant Review’s research, successfully led to the removal of a controversial carveout in CD&R’s latest bond offerings. This highlights the critical importance of vigilance and pushback in protecting covenant standards.

• An often–used liability management tactic is to strip valuable assets from the credit by using “investments” capacity to divert those assets to Unrestricted Subsidiaries for the purpose of incurring structurally senior debt at the Unrestricted Subsidiary
  

• Some high yield Restricted Payments covenants include a carveout that permits Restricted Payments and investments if a certain leverage ratio test can be met, and aggressive versions of this carveout allow them if the leverage ratio would be no worse, pro forma for the transaction.
  

• CD&R, well known for having one of the most aggressive high yield covenant packages in the market, is pushing this flexibility to a nonsensical extreme.
  

• CD&R’s latest bond offering for Shearer’s allows any assets to be diverted to an Unrestricted Subsidiary so long as pro forma leverage would be the same or worse.

• While the sheer absurdity of this provision suggests it could be a drafting error, the markets should note that CD&R has put this trick in other deals.

  Investors must reject this CD&R language now to avoid having it used against them later