Avis Budget Group in April obtained a covenant waiver for both a $1.2 billion term loan and a $1.8 billion revolving credit facility.
Photo: David Paul Morris/Bloomberg NewsFinance chiefs are asking lenders to waive some financial requirements or give them additional flexibility in how they account for coronavirus-related expenses so their companies don’t violate loan terms.
Many companies have suffered severe declines in revenue and earnings amid the coronavirus pandemic, hurting balance sheets and potentially resulting in violations of loan and debt agreements, or covenants. Those terms can include hitting certain financial targets—for example, the ratio between net debt to earnings before interest, tax, depreciation and amortization, or Ebitda—and holding a specific amount of cash as reserve. Companies usually have to prove to their lenders on a regular basis they still meet those requirements.
A consortium of 21 banks agreed to waive the covenant test until December 2021 for Cimpress PLC, said Sean Quinn, its chief financial officer. The Ireland-based owner of marketing and customized products provider Vistaprint raised $300 million in capital at the end of April.
Cimpress previously discussed a waiver without raising capital, but decided the funds would provide it with more flexibility in negotiations. “Bringing in that capital allowed us to have a different set of discussions with banks,” Mr. Quinn said.
Nearly 100 other public companies, including cinema operator Cinemark USA Inc., clothing retailer Hanesbrands Inc. and casino operator Wynn Resorts Ltd., through May 15 pursued waivers or amendments to existing loan agreements, according to Moody’s Investors Service, which tracks companies that have disclosed these changes in filings with securities regulators.
Cimpress CFO Sean Quinn.
Photo: Cimpress/VistaprintBanks and other lenders are scrutinizing the long-term viability of businesses applying for changes to their terms on a case-by-case basis, said Ted Swimmer, head of corporate finance and capital markets at Citizens Financial Group Inc. “There is no playbook, but we are trying to get companies through this situation that is not anybody’s fault,” Mr. Swimmer said. At the same time, the bank is managing its own risk exposure, he said. “Businesses that were in trouble before the pandemic might not make it through to the other side.”
Sometimes, the added flexibility is short-lived though. Hertz Global Holdings Inc. earlier this month secured limited waivers with some of its lenders until May 22 to find a solution after it failed to make a lease payment of roughly $400 million in April. Hertz then “pressed its lenders to extend their waivers and forbearances to permit a meaningful exploration of potential reorganization structures,” finance chief Jamere Jackson said in a court document.
The company filed for chapter 11 protection Friday after it didn’t reach an agreement with its lenders. “Unfortunately, the forbearance agreement and the waiver agreements lasted only through May 22, 2020,” Mr. Jackson said in the court filing.
Hertz rival Avis Budget Group Inc. in April obtained a covenant waiver for both a $1.2 billion term loan and a $1.8 billion revolving credit facility, Treasurer David Calabria said. The car-rental company gets a break until June 30, 2021. Avis also managed to get its credit facilities amended, permitting it to take on $750 million in new debt. Avis raised $500 million earlier this month, Mr. Calabria said.
While such changes provide finance executives with additional flexibility to respond to the economic shock, they raise concerns among investors and analysts, as creditors might have less options to intervene when a borrower gets into financial distress.
“Covenant protections have steadily and dramatically weakened in the last decade,” said Enam Hoque, a senior covenant officer at Moody’s. A loan covenant quality indicator by Moody’s going back to 2012 hit its weakest point at 4.23 at the end of 2019, on a scale of 1 to 5 where 5 is the weakest reading. Bond covenant quality also came close to its weakest level on record in April, Moody’s said.
“Investors are now in uncharted territory, as weak covenant packages…leave them without rights that have traditionally been available when a borrower is in financial distress,” Mr. Hoque said. “At the same time, borrowers have unprecedented flexibility to manage their businesses.”
Instead of requesting waivers, companies can ask to take into account certain nonrecurring expenses when calculating Ebitda, which can help them comply with covenants.
“Our expectation is that companies will push to make more adjustments to their Ebitda,” said David Zion, head of accounting and tax research firm Zion Research Group.
It depends whether credit agreements permit companies to account for unexpected expenses related to the pandemic. For instance, a company may ask that costs incurred in buying personal protection equipment or cleaning products be included as nonrecurring expenses that could boost Ebitda, said Janet Vance, a partner at Gibson, Dunn & Crutcher LLP, a law firm.
“Where lenders need to be careful is when regular expenses are grouped with nonrecurring coronavirus-related expenses,” said Lyuba Petrova, a senior director at Fitch Ratings.
Many credit agreements already have caps that limit the amount of expenses that can be added back—typically a set percentage of a company’s Ebitda. Cimpress, for instance, has a 20% limit for one-time cash losses and other expenses in its credit agreement, Mr. Quinn said.
That, however, will go into effect only when the company’s covenant waiver ends in 2021. “The actions we’ve taken, including the covenant suspension, allow us to focus on execution, protect investments for future growth, and enable us to thrive in a post-pandemic landscape,” Mr. Quinn said.
Write to Nina Trentmann at nina.trentmann@wsj.com
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