High-yield covenants and other key terms in the European high-yield market
Produced in partnership with Christopher J. Capuzzi and Simone Bono of Freshfields
High-yield covenants and other key terms in the European high-yield market

The following Banking & Finance guidance note Produced in partnership with Christopher J. Capuzzi and Simone Bono of Freshfields provides comprehensive and up to date legal information covering:

  • High-yield covenants and other key terms in the European high-yield market
  • What are high-yield covenants?
  • Overview of main high-yield covenants
  • Redemption of high-yield bonds
  • Amendments and waivers
  • Conclusion

What are high-yield covenants?

High-yield covenants are crafted to impose restrictions on certain types of activities by the issuer to protect the investment made by holders of high-yield notes. They typically will be triggered upon the taking of specified corporate actions, in particular the incurrence of additional indebtedness or the transfer of value out of the group and are therefore also known as 'incurrence' covenants. Therefore they will only need to be tested when the issuer or any of its restricted subsidiaries take certain corporate actions, such as incurring additional debt or making certain payments that high-yield investors consider cash-leakage. Unlike a typical senior bank facility, high-yield covenant packages will normally not require the issuer to maintain compliance with specified financial requirements on an ongoing basis, ie do not contain so-called 'maintenance' covenants. Bank facilities, on the other hand, typically focus on maintenance covenants, which would require the controlled group to maintain certain conditions, or prohibition covenants, which require the controlled group to prevent certain conditions from coming into existence.

In negotiating such covenants, a balance must be struck between preserving the ability of the issuer to pay interest and principal on the high yield notes when due and giving the issuer the flexibility to grow its business during the term of the high-yield notes. Positive growth will enhance the