High Yield Bond Covenants

1. A4 High Yield Bond Covenants Gareth Noonan Director, European High Yield Capital Markets CONFIDENTIAL DRAFT

2. High Yield Bonds – Structural Overview • A company’s debt capital structure is typically divided into several constituencies • Senior debt • Subordinated debt • Senior Debt – Usually provided by a bank or other lending institution pursuant to a Credit Agreement • Lowest cost • Variable interest rate • Secured by all/most assets • Yearly amortisation of principal • “Maintenance” covenants require the company to meet 90% (+ or -) of its projections • Subordinated Debt – Usually high yield bonds • Higher cost - compensates for lack of protections that senior lenders have • Fixed interest rate • Unsecured 1

3. High Yield Bonds – Structural Overview Typical Contractual Subordination Senior Secured Bank Debt Parent HoldingCompany Bondholders agree to “turn over” to banks anything they get from obligors until banks are paid in full Senior SubordinatedNotes Senior Secured Guarantees OPCO OPCO OPCO Senior Subordinated Guarantees 2

4. High Yield Bonds – Structural Overview Typical Structural Subordination Parent HoldingCompany Senior Notes Bondholders claims to assets and cash flow of business are limited to dividends from Opcos. Banks won’t allow Opcos to pay dividends unless they know they are covered first OPCO Senior Secured Bank Debt 3

5. Why Do Bond Investors Need Covenants? • Covenants protect bondholders against a diminution in value of their investment through • Credit deterioration • Loss of “equity cushion” • Loss of control over assets • Loss of seniority position • Covenants increase the chance of capital gains for bondholders because they force the company to • Deleverage (or, more accurately, limit the company’s ability to releverage) • Reinvest earnings • The typical restricted payments covenant requires the company to retain 50% of net income in the business and allows 50% to be dividended out to stockholders • As a result, covenants lead to credit improvement which increases chance that bonds will trade above par 4

6. Who is Subject to Covenants? • The Company and its Restricted Subsidiaries are subject to the covenants, even if the Company is the only signatory to the indenture. Each covenant begins with the phrase“The Company will not and will not permit any of its Restricted Subsidiaries to…” • Unrestricted Subsidiaries are not subject to any of the covenants • The covenants place a firewall between the issuer and its Restricted Subsidiaries, on the one hand, and the Unrestricted Subsidiaries on the other hand Issuer Restricted Group Restricted Sub Restricted Sub Restricted Sub Unrestricted Sub 5

7. Specific Covenant Issues • Each deal is different, but in every deal the two most important covenants are • Debt incurrence • Restricted payments • Other covenants are less crucial but are important too. The other covenants typically include • Change of Control • Affiliate transactions • Mergers • Asset sales • Anti-layering • Liens • Dividend stoppers at subsidiaries • All of these covenants are “incurrence” tests • Whereas “maintenance” covenants are customary in bank deals, failure to maintain specified leverage/cash flow ratios will not cause a default under a high yield indenture 6

8. High Yield Terms Covenants – Debt Test – Ratio Tests • Restricts incurrence of debt (subject to certain exceptions) unless either • A ratio test is met, or • A “Permitted Debt” basket is granted • There are two possible ratio tests • Fixed Charge Coverage Ratio(EBITDA/Interest Expense) • Typically 2.0x • May ratchet up • Leverage Ratio(Debt/EBITDA) • Typically around 6.0x • This is the preferred ratio for media and telecom companies • Purpose of the ratio test is to allow the Company to incur more debt as the credit improves • The ratio tests utilise the Company’s EBITDA and interest expense over the last four quarters • Bond covenants do not use projections • LTM results are adjusted so that they are a more meaningful yardstick for measuring the Company’s ability to service more debt in the future 7

9. High Yield Terms Covenants – Debt Test – Adjustments • Definitions are key (Consolidated Net Income, Consolidated Cash Flow) • Pro forma adjustments to the LTM numbers are important • Typical adjustments include: • Pro forma for acquisitions and divestitures as if they had occurred at the beginning of the period • Pro forma for increases and decreases in debt as if they had occurred at the beginning of the period • Eliminating impact of “extraordinary” items; Eliminating other “unusual” items that are not indicative of future operations; “unusual” is in the eye of the beholder • Some companies want to more aggressively adjust their historical numbers to • Include anticipated future cost savings from acquisitions • Exclude “unusual” or “nonrecurring” charges • Make other adjustments that would not pass muster with the SEC under Regulation S-X 8

10. High Yield Terms Covenants – Debt Test – Carve outs • All debt covenants also include a concept of “Permitted Debt” (which can be incurred even if the ratio test cannot be satisfied) • Will usually be a $/euro amount sufficient to fund total interest expense for at least 6-12 months • Other carve outs: • Bank carve out (with ratchet down) • Existing debt • Capital leases • Inter-company debt • General basket • Others 9

11. High Yield Terms Covenants – Restricted Payments • The purpose of this covenant is to protect bondholders’ access to value by limiting undesirable asset transfers such as • Dividends/repurchases of equity • Retiring debt that is subordinate to the bonds before retiring the bonds • Investments in entities that are not Restricted Subsidiaries Company Restricted Group Third PartyInvestor 60% 40% Restricted Sub Restricted Sub Restricted Sub JV Investments are usually the subject of a separate covenant in bank deals 10

12. High Yield Terms Covenants – Restricted Payments • The basic test prohibits all of these asset transfers (known as “Restricted Payments”) unless • Total Restricted Payments are less than 50% of “Consolidated Net Income” since the closing of the high yield deal; and • Company could incur $1 of additional debt at time of making the payment • i.e., Fixed Charge Coverage was 2.0x or higher (or Leverage Ratio was 6.0x or lower) • No default has occurred and is continuing • Customary exceptions include • Permitting limited repurchases of management equity in connection with stock option plans • Subject to a dollar cap per annum • Permitting new equity proceeds to immediately flow back out and repurchase old equity or to make a restricted investment 11

13. High Yield Terms Covenants – Restricted Payments - Permitted Investments • Any investment in the issuer or in a restricted subsidiary is permitted • Any investment in a person, if as a result of such investment such person becomes a restricted subsidiary • Any acquisition of assets solely in exchange for the issuance of equity • Others – Note these covenants allow issuers to make investments (but not pay dividends) even if the main “basket” is negative • Sometimes limited by including a “Permitted Business” standard 12

14. High Yield Terms Covenants – Change of Control • This covenant gives each bondholder a separate put right at 101% of par if a “Change of Control” occurs • Bondholders are investing in the existing equity sponsor and Board of Directors • Bondholders want to have the option to exit the deal if a new person or group takes over the company • Merger of two public companies may not trigger the change of control (unless you have a single stockholder or group that controls the surviving company) • The definition of “Change of Control” may vary • Typical provision is tripped if • Any single person or “group” acquires more than 35-50% of the company’s outstanding voting stock • Exception for original deal sponsor and entities controlled by that sponsor • A new Board of Directors is elected without the blessing of the incumbent board • Typically not a “Change of Control” if the sponsor sells down to below 50% (or sells out) but may be in some cases 13

15. High Yield Terms Covenants – Affiliate Transactions • This covenant protects against disguised dividends by preventing the company from entering into non-arm’s-length transactions with its affiliates such as • Paying excessive management fees to deal sponsors • Selling assets to stockholders for less then FMV • Overpaying stockholder/employers through excessive salaries • Affiliate transactions are not prohibited, but must be arm’s-length and approved by disinterested directors • Fairness opinion also required if transaction is large enough (involves payments >$5-10M) 14

16. High Yield Terms Covenants – Asset Sales • The purpose of this covenant is to make sure that the Company’s balance sheet stays in balance • Company can sell assets, but must get • FMV • Mostly cash (75-85%) • Exception to this for “Asset Swaps” is common • Must use the proceeds to either • Repay senior debt or • Reinvest in [long-term] assets useful in the business or • Make an offer to repurchase the bonds • In other words, if assets shrink, must replace with new cash-flow generating assets or reduce debt 15

17. High Yield Terms Covenants – Liens and Anti-layering • Liens • Protect seniority position • Senior noteholders don’t want more secured debt ahead of them -- in particular, they don’t want the next senior note deal to be secured • Seniorsubordinated noteholders don’t want liens securing any other senior subordinated debt • Anti-layering • Prevents issuer from layering debt between the senior and subordinated debt • Only used in senior subordinated deals • Ensures that subordinated debt occupies the second class slot (and not the third or fourth) Lien and anti-layering covenant issues are complicated by structures which include second lien loans and bonds 16

18. High Yield Terms Covenants – Dividend Stoppers • Dividend Stoppers (“Pinching the straw”) • Protects the flow of cash from the subsidiaries • Dividend stoppers can create structural subordination (no access to cash flow) • Important in holding company deals where bank debt is at the operating company 17

19. High Yield Terms Covenants – Merger Test • Applies to mergers where the issuer is a party • Does not apply to subsidiary mergers • Applies to a transfer of “all or substantially all” of the assets • Bonds should follow the assets • Prevents the assets from moving as a whole unless the credit can handle it • Merger or sale of all assets okay if: • The surviving entity assumes the bonds • The surviving entity can incur ratio debt 18

20. High Yield Terms Covenants – Reports & Other Covenants • Reports • Requirement to make public disclosures of results • SEC form? • Quarterly versus semi annual • Website posting • Bloomberg • Bank covenants • Other Covenants • Sale/Leaseback • Sale of equity of subsidiaries • Additional amounts • Payments for consent • Permitted business 19

21. Topics for a Second Meeting • Subordination and Inter-creditor Issues • Guarantee Structures and Limitations • Optional Redemption Terms • Floating Rate Note Structures • Senior Secured Notes • 2cnd Lien Notes • PIK Note Structures 20