AMF Bowling 1st-lien TL sinks as refi risks prompt downgrade to CCC+

AMF Bowling’s first-lien B term loan (L+275) today sank more than two points, to 87.5/88.5, on the heels of Standard & Poor’s downgrading both the corporate credit rating and the issue level rating on the first-lien senior secured debt to CCC+, from B- and B, respectively, due to refinancing risk. The second-lien term loan was downgraded to CCC-, from CCC, and the rating outlook across the board is negative.

Tuesday’s downgrade on the roughly $300 million in bank facilities, two of which are covenant-lite term loans, “reflects the significant refinancing risk associated with the 2012 and 2013 maturities and our view that a restructuring of at least a portion of its debt obligations is becoming more likely,” according to the S&P report.

On Monday, the TLB was quoted at 89.5/91.5, while the second-lien term loan (L+625) was pegged at 83/85. Both term loans are due June 2013. No current marks were available on the second-lien TL, or the $40 million revolving credit facility (L+275) due June 2012.

S&P noted that even in the event AMF does successfully extend maturities, the privately-held company would likely face higher interest costs, as financial market conditions have “meaningfully changed” since the existing credit facilities were put into place and AMF’s operating performance has weakened.

AMF tapped the market in mid-2007 via Credit Suisse to fund a payout to financial sponsor Code Hennessy & Simmons and to refinance existing debt. Dutch auctions since then have enabled Code Hennessy  to use equity to reduce the original deal size of $365 million to $300 million, sources said.

“We believe AMF would likely have difficulty meeting its fixed charges if it were subject to meaningfully higher interest rates,” S&P said in its June 28 report. S&P lowered its recovery rating on the first-lien facilities from 2, to 3, reflecting the expectation for a 50-70% recovery for lenders in the event of a payment default. The second-lien TL kept its recovery rating of 6, an expectation of 0-10% recovery.

Revenue was flat through the first nine months in AMF’s fiscal 2011 (ending June), while EBITDA was down roughly 4% versus the year-ago period, according to S&P’s report.

AMF is said to have struggled to contain its relatively high fixed costs in recent years as revenue continued to decline. And the forecast is dim, as S&P expects operating-lease-adjusted total debt to EBITDA and EBITDA coverage of interest expense to be in the high-8x and mid-1x areas, respectively, at the end of AMF’s fiscal 2011.

Finally, S&P said it views AMF’s liquidity as “less than adequate,” given the significant refinancing needs. “AMF would be subject to a 4.25x total-leverage-ratio covenant if average daily borrowings for any quarter exceed $10 million under its $40 million undrawn revolving credit facility. Therefore, borrowing availability is currently limited to a $10 million average outstanding at any quarter-end, as leverage as measured per the credit facility exceeds 7x.”

Code Hennessy purchased AMF Bowling in 2004 for $307.5 million in cash and $352.5 million in assumed debt. The owner of bowling centers emerged from Chapter 11 in March 2002. – Beth Campbell