The Leveraged Lion Capital investment process has been refined and improved since the inception of the organization in 2017. The fund takes a top-down approach to investing as the Chief Investment Officer of LLC publishes quarterly investment outlooks, highlighting key macroeconomic trends and assigning which sectors to be overweight and underweight. As the fund is broken out into sectors covering a wide array of industries, it is the responsibility of lead analysts to then source investment opportunities in the high yield space and put together a “pitch” to the rest of Leveraged Lion Capital.
What may of note is that analysts are limited in their approach as they only look at public companies in the space, as information on privately held corporations is too limited for sectors to put together an adequate pitch. This is due to the way pitches are structured – which mandate sectors report the company’s financials, business segment breakdown, capital structure, and much more.
Due to the higher risk involved with non-investment grade companies, HY bonds and Leveraged loans contain certain key agreements between the lender and the issuer. These agreements aside from the general terms of the credit include many restrictions on the issuer to ensure the safety of the lender’s investment. These restrictions are broken into financial, affirmative and negative covenants. Maintenance financial covenants are exclusive to leveraged loans while the HY bond indenture typically contains only affirmative and negative covenants. and they require the issuer to maintain compliance with a certain financial requirement over a certain period. This helps monitor the health of the issuer and pushes the issuer to maintain performance. The most used ratios for maintenance covenants are total net or net debt to EBITDA and the interest coverage or fixed charge coverage ratios. Affirmative covenants require the issuer to perform certain actions to maintain compliance. In contrast, negative covenants restrict the firms from performing certain actions ranging from acquiring companies to paying dividends. Analysts spend considerable time analyzing the credit agreement or the indenture to ensure that the credit is well protected in a lenders point of view and there are no loopholes that the company could misuse. Majority of the time is spent on analyzing the various negative covenants and the protections they provide to ensure that the credit is well protected for its yield. The major negative covenants we look at among others are limitations on liens, limitations on debt, limitations on affiliate transaction, limitation on restricted payments, limitation of sale/leasebacks, limitations on asset sales, MFN sunsets and change of control provision.
Restricted Payments - Restricts the company in making payments related to dividends, redeeming securities, investments in unrestricted subsidiaries and other payments that erode credit support. It is focused on restricting the company to use the cash raised from regular operations:
Indebtedness - Restricts the company on incurring additional debt. Its main focus is to protect the credit holders from the issuance of additional debt unless the borrower has ensured its debt capacity
Sale of Assets - the covenant does not restrict the company from selling assets. However, it requires that a certain portion of the sale proceeds in received in cash be used to pay back debt.
Limitations on Liens - the covenant’s main focus is to protect the bondholder from the issuer contractually subordinating the bondholder's debt
Limitation on Affiliate Transaction - the covenant is to protect the leakage from the credit group to stockholders and other affiliates
In an event that the company does not comply with the requirement, the issuer usually is given some grace period to facilitate turnaround. In a case that does not work, the lender can force their power into the issuer.