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Now You See It Now You Don’t – Definitions Designed to Confuse?

Issuers are increasingly negotiating a myriad of ways to build flexibility into ratio definitions – increasing capacity for debt incurrence, dividend payments, portability and/or the ability to secure further debt on collateral granted to noteholders at issue, according to the 2016 Aggressive Terms Review by Debt Explained.

Increasingly, issuer definitions are becoming more complex, allowing greater flexibility to meet the ratios. In 2016, Debt Explained noted the following ways in which Issuers have carved out greater flexibility in calculating ratios – uncapped EBITDA add-backs; pro forma adjustments for cost savings and synergies; different application of those requirements across ratios; expansion of the Limited Condition Acquisition calculations; and carving out types of secured debt in secured leverage ratio calculations.

Some 16% of deals had the ability to add cost savings and/or synergies back to EBITDA through an add-back definition. These add-backs are, increasingly, uncapped or in some cases capped in different ways for M&A on the one hand and other general corporate restructurings on the other hand, making risk assessment harder and magnifying the risk of concealing deteriorating performance.

Other key findings:

  • Issuers continue to negotiate exceptions to the waterfall of proceeds in the asset sales covenant with 35% of deals allowed immediate payment of restricted payments/permitted investments from asset sales;
  • 31% of deals set the Contribution Debt Basket – allowing issuers to incur additional debt for net cash proceeds from equity or subordinated shareholder debt issuance – at 1:1 but two deals set the bar at 2:1; and
  • The use of EBITDA-based grower caps has continued unabated in up to 35% of deals in 2016.


Stephen Mostyn-Williams, Chairman of Debt Explained, explained that the report shows how important it is to track the details of the terms and conditions in the  European high yield market.

“The investor protections created by the traditional HYB covenant package are being substantially diluted or some might argue destroyed. What is very clear is that the “fine print” of deals is ever more tortuous and opaque with potentially unanticipated results over time. It is only when looking at the market as whole using data that the full picture emerges and the power (and danger) of “precedent” is revealed. Without expert analysis investors may be surprised by what they have agreed!” .

About the Report

This report refers to data drawn from Debt Explained’s Market Maker Database which tracks information from deals in the European high yield bond market.

The report is based on those deals which were in the market during 2016, as indicated, and which were reviewed by Debt Explained during this period and no distinction is made between deals with different governing laws unless otherwise stated.

Debt Explained’s Market Maker and Representative Loan (leverage loan) databases offer unique oversight of the European high-yield bond and leveraged loan markets, with more than 550 and 350 searchable terms respectively. A staple resource for all leveraged finance market participants – including capital markets bankers, legal advisors and asset managers – Debt Explained data reacts to the market in real time: subscribers receive detailed deal “snapshots” on new issues as information is released.

About Debt Explained

Debt Explained is a leveraged finance data firm and the only independent provider of High Yield Bond and Leverage Loan Legal Analysis in the European Market. In addition to storing analyses in custom, searchable databases, the company sends out timely and finely-tuned “snapshots” following the activity of the primary and secondary markets.

Debt Explained was founded in 2010 by Stephen Mostyn-Williams, previously a Senior Partner at four international law firms and the chair and co-founder of the European High Yield Association. It is staffed by experts in Capital Markets and Financial law with extensive experience in new issuance, corporate advisory work and restructurings. We pride ourselves on hiring extremely experienced professionals as we know the level of expertise that is required to put deals together. As a consequence we only hire lawyers with at least 10 years in capital markets or financial law and with deep knowledge of our product areas.


For further information on Debt Explained please contact Sophie Belcher on +44 (0) 20 7100 9777 or


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