Trade body urges investors to quiz issuers on covenants

The European Leveraged Finance Alliance (ELFA) – launched near the beginning of this year to act as a pressure group representing the interests of the buy-side in the high yield bond and leveraged loan markets – has launched the ELFA Key Covenant Questionnaire.

The questionnaire is designed to encourage investors and issuers to engage more closely on covenant terms during roadshow meetings. ELFA says it is the first initiative from its Diligence series, under which tools will be published to facilitate investor engagement with issuers on covenant risk.

There have been concerns expressed that investors are often not really aware of what they are signing up to, even though there has been plenty of pushback on deal terms in both the high yield and leveraged loan markets.

The questionnaire aims to “encourage disclosure of, and facilitate discussion about, key covenant metrics, and to highlight the intentions of the issuer with respect to ongoing reporting,” according to a statement issued by ELFA.

ELFA said that last week it had circulated the questionnaire to ELFA members and other investors in the European leveraged finance market and encouraged them to circulate it among their teams and to contacts at other firms. It said it wanted investors to ask the questions at each roadshow meeting during the primary marketing process for high yield bonds.

The questionnaire has also been sent to European arranging banks so they know in advance and can brief management that they may be asked these questions.

“The questionnaire is a critical step in ELFA’s mission to facilitate engagement on covenant terms among market participants,” ELFA executive advisor Sabrina Fox told PDI. “This engagement is more important than ever, with covenant flexibility at all-time highs and many metrics calculated using information that only management has access to. The questionnaire will encourage open discussion on covenant capacity and the issuer’s intentions with regard to ongoing financial reporting.”

The questionnaire will be posted in due course on ELFA’s website. Here are the questions it encourages investors to ask:

Covenant leverage: What would day one leverage be if calculated under the covenant definitions?

Covenant capacity: What is your covenant EBITDA? What is your restricted payments capacity on day one? What is your debt headroom on day one, secured and total?

Reporting: Do you intend to post on-going financial reports behind a password-protected website? If so, what is the URL? Who will investors contact for a password? Do you intend to host quarterly reports to contain materially similar financial and operating information as your annual reports and what is presented in the offering memorandum?

Sponsor: Have you identified acquisition opportunities for the target? What is your core investment thesis, including timeframe and scope?