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American Airlines says it signs NDAs with US Airways, others; next step in merger exploration

American Airlines and US Airways jointly announced today that they have entered into a non-disclosure agreement under which the companies have agreed to exchange certain confidential information and, “in close collaboration with” the unsecured creditors’ committee in American’s Chapter 11 proceeding, they will “work in good faith to evaluate a potential combination.”

The companies said they do not expect to provide any further announcements regarding the status of any such discussions “unless and until the parties have entered into a transaction or discussions between the parties have been terminated.”

American and US Airways also said they have agreed that while they are evaluating a potential combination, neither party would “engage in discussions with other parties concerning a potential combination of [American] and US Airways.”

American, meanwhile, also said in a separate message to managers that “other parties have also signed confidentiality agreements,” although the company did not identify the other signers.

As reported, JetBlue CEO Dave Barger told Bloomberg in an interview on Aug. 20 that his company was not interested in a deal with American. Besides US Airways and JetBlue, three industry names mentioned as possible merger partners for American are Alaska Air, Frontier, and Virgin America. – Alan Zimmerman

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Syms Corp receives confirmation from bankruptcy court on reorganization plan

The bankruptcy court overseeing the Chapter 11 proceedings of Syms Corp. confirmed the company’s reorganization plan, Syms announced yesterday. A confirmation hearing, which began Aug. 29, concluded on Aug. 30, according to court filings, with the bankruptcy court in Wilmington, Del., overruling several objections.

As reported, the company’s plan would create a new company that would dispose of Syms’ real-estate assets over time. Marcy Syms, the current majority shareholder, would sell her shares in their entirety to the newly constituted Syms at a price of $2.49 per share. Meanwhile, Syms would offer to sell to existing accredited shareholders – other than Marcy Syms – the right to purchase a total of more than 10 million new shares at a price equal to $2.49 per share, or roughly $25 million in the aggregate. Equity committee members DS Advisors, Esopus Creek Value Series Fund, and Marcato Capital Management have agreed to backstop the offering.

Proceeds from the rights offering, along with proceeds from real-estate dispositions, would be used first for payment of exit and other costs, with any remaining proceeds to be split between creditors and Marcy Syms, with creditors receiving 60% and Marcy Syms receiving 40%, until she is paid about $10.73 million. The balance, which would be due to Marcy Syms – another roughly $7.1 million – is slated to be paid after a reorganized Syms has satisfied all its obligations to creditors under the plan.

Under the proposed plan, Syms creditors would be paid in full.

Creditors of Syms unit Filene’s Basement, meanwhile, who contend they hold potential claims against Syms that, if successful, would pay them in full, would be governed by a compromise under which claimholders would share in a portion of the proceeds of Syms’ assets on a delayed basis, such that trade creditors and employees could ultimately be paid in full and holders of lease rejection claims could be paid at 75%, over time. Alternatively, Filene’s creditors would have the option of accepting distributions from Filene’s assets alone, which would give them a recovery of 0-2%, while preserving any claims they may have against Syms.

According to a company announcement, upon emergence from Chapter 11 the reorganized Syms’ new board of directors is to be comprised of three directors appointed by the equity committee, one director appointed by the creditors’ committee, and one independent director mutually chosen by both committees.

As reported, Syms filed for Chapter 11 on Nov. 2, 2011, after a five-month sales process failed to turn up any buyers, saying it intended to liquidate all of its assets. As of Dec. 31, 2011, the company terminated all of its retail operations, leaving only its real estate intact.

In February, however, the equity panel in the case sought to terminate the company’s exclusive right to file a reorganization plan in order to file a plan of its own. Ultimately, the panel agreed to return to the bargaining table, and while negotiations were bumpy over the next several months, on July 12 the company filed a proposed reorganization plan with the support of both the creditors’ and equity holders’ committees.

The bankruptcy court in Wilmington, Del., approved the company’s disclosure statement on July 13. –Alan Zimmerman

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DuPont Coatings buyout by Carlyle Group likely to yield big loan, bond financings

The Carlyle Group’s purchase of DuPont Performance Coatings is expected to yield debt financing of roughly $3.9 billion, according to sources.

The $4.9 billion cash purchase is expected to close in the first quarter 2013, subject to customary closing conditions and regulatory approvals. The companies’ announcement didn’t identify the lead lenders, but bankers who’ve been evaluating the transaction in recent months suggested the deal could include roughly $2.5 billion of term loans and another $1.4 billion of bonds.

The transaction was not included in yesterday’s estimate of the visible institutional calendar; including the deal would push the visible pipeline to $25.9 billion, and the visible M&A related institutional pipeline to $18.6 billion.

DPC is a global supplier of vehicle and industrial coating systems with 2012 expected sales of more than $4 billion and more than 11,000 employees.

Founded in 1922 and headquartered in Wilmington, Del., DuPont Performance Coatings is a global manufacturer, marketer, and distributor of advanced coating systems primarily for the transportation industry. The company comprises four segments: refinish, OEM, industrial liquid, and powder. The company operates manufacturing sites on six continents, serving customers in 120 countries directly and through 4,000 distributors.

Carlyle’s industrial and automotive investments include Allison TransmissionHertz, and PQ Corporation, as well as recent commitments to invest in Hamilton Sundstrand IndustrialSunoco’s Philadelphia refinery and regional rail freight operator Genesee & Wyoming. – Chris Donnelly

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Contec bankruptcy pushes default index up to 1.21%, was 1.06% in July

Contec Holdings‘ bankruptcy filing today pushes the default rate by number of issuers in the S&P/LSTA Leveraged Loan Index up to 1.21%, versus 1.06% in July. The default rate by principal amount is now 1.07%, versus 1.04% in July.

The default rate by issuer number moved above 1% in June after 10 months of being below even that minimal level, while the default rate by amount moved above 1% in May for the first time in over a year at the time.

The default rate is calculated on a rolling 12-month basis.

LCD’s shadow default rate moved to 1.23%, from 1.20% as of July. The total volume on the shadow list now comes to $790 million.

The credit facility impacting the default index is the $201 million senior secured credit facility held by Barclays Bank as administrative and collateral agent. The senior facility comprises a $20 million revolver and a $185 million term loan (L+475, 3% LIBOR floor). – Max Frumes

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American Airlines creditors offer equity financing for reorg plan

American Airlines is seeking bankruptcy court approval to pay the legal and financial advisory fees for an ad hoc group of creditors that might provide equity or other financing to help the company exit Chapter 11.

In a motion filed this morning, AMR Corp. said the ad hoc group represents “a substantial and diverse group of creditors of American,” and that it is “prepared to engage in negotiations with [AMR] concerning a plan or plans and such commitments, subject to appropriate due diligence.” The group, which was formed in April, consists of the following members:

  • Carlson Capital
  • Claren Road Asset Management
  • CSS, LLC
  • Cyrus Capital Partners
  • JP Morgan Securities
  • King Street Capital Management
  • Pentwater Capital Management
  • Tricadia Capital Management
  • York Capital Management Global Advisors

AMR has asked the court to approve payments to the group’s lawyers at Milbank, Tweed, Hadley & McCloy, at the firm’s regular hourly rates, and to financial advisors Houlihan Lokey Howard & Zukin. Houlihan’s proposed fees would include a $150,000 monthly rate, plus a “reasonable success fee,” if binding commitments result from the group’s efforts that are closed and funded.

In addition to possible equity commitments, the ad hoc group’s fee letter indicated that it is also “exploring strategic alternatives involving a potential public combination transaction in collaboration with the [official creditors’ committee].” A hearing on the proposed fee letter is scheduled for Sept. 20.

Meanwhile, a spokesman for the main pilot union for US Airways said yesterday that AMR has asked US Airways to end merger negotiations with its unions, as a sign of good faith, and to act as if it had signed a non-disclosure agreement with AMR so that it may continue merger negotiations directly with the company. According to The Dallas Morning News Airline Biz Blog, the US Airline Pilots Association issued a statement to its members on Aug. 27 incorrectly stating that US Airways had already signed an NDA. The union’s spokesman issued a correction on Aug. 28. – John Bringardner

Most Recent Comps (for LCD subscribers)

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American Airlines (HY 3/11) 1000.00M Deal Dossier

 

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Off to the races: August volume records tumble in hot leveraged loan market

This year, the dog days of summer proved to be more greyhound than basset hound. Amid strong demand, leveraged loan volume in August handily beat expectations. In all, arrangers inked $15.9 billion of new loans during the month (as of Aug. 24), including $11 billion of institutional tranches, making it the busiest August on record by both measures.

August’s relative volume bonanza was fueled by a combination of strong technicals and benign macroeconomic conditions that opened the door for issuers and arrangers to unleash a flurry of opportunistic deals. On the demand side of the ledger, EPFR data show that loan mutual fund flows took in $271 million during the month (as of Aug. 24), following $657 million of inflows in July. What’s more, CLO volume was unexpectedly strong, at $2.3 billion in August, versus $1.8 billion in July.

On the other side of the ledger, the amount of S&P/LSTA Index loans outstanding grew by $6.6 billion.

What this chart does not reflect, however, is the influence of the high-yield market, which delivered a double-barrel technical boost to the loan market in August. First, arrangers say there was significant crossover demand from high-yield accounts, which were flush with $2 billion of fresh mutual fund inflows during the month, according to EPFR. Second, high-yield takeout volume surged to $5.1 billion (pro forma for repayments that have yet to hit the Index), the most since November 2010.

Indeed, the high-yield market was on fire in August, with monthly volume projected to be $30.3 billion, the highest total since March.

For these reasons, new-issue clearing yields fell to five-month lows:

And original-issue discounts eroded to their narrowest level since May 2011:

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“Location, Location,” again: Patriot Coal defends its filing of Chapter 11 case in Manhattan

Patriot Coal defended its decision to file its Chapter 11 case in bankruptcy court in Manhattan, saying that in light of the worldwide scope of its business, “the Southern District of New York provides an overwhelmingly more convenient and cost-effective forum.”

As reported, last month the United Mine Workers, a union representing some 40% of the company’s employees, filed a motion to transfer venue in the case to Charleston, West Virginia, arguing that most of the company’s business and employees are located there, and because West Virginia has a much more significant interest in the company’s reorganization than New York (see “Patriot Coal union says Ch. 11 should be moved to West Virginia,” LCD, July 19, 2012).

“No one mines coal in New York,” the union said in its motion.

The U.S. Trustee for the New York bankruptcy court also filed a motion late last week arguing that venue should be transferred from the jurisdiction, on the grounds that the company’s creation of two New York subsidiaries shortly before its filing, ostensibly for the sole purpose of establishing venue in the state, was improper. Unlike the UMW, however, the U.S. Trustee did not urge a transfer to any other specific court.

In its Aug. 27 response to both motions, the company conceded that the lion’s share of its mining operations and employees are located in West Virginia, but the company argued that those facts do not necessarily mean that West Virginia is a better forum in which to adjudicate its bankruptcy. Patriot Coal noted, for example, that its headquarters and administrative offices were located in St. Louis, and that 95% of the company’s coal is supplied to customers outside of West Virginia.

“The debtors’ creditors, like their businesses, are also spread out throughout the United States and abroad,” the company said. “A transfer to West Virginia would be more convenient for very few creditors, most of whom will play little or no active role in the court proceedings, and would impose enormous costs and administrative strains on these cases.”

The company argued that in a “complex case such as this, which involves operations, financial interests, and creditors across the United States and around the world, the tremendous efficiencies that are gained by proceeding in New York City, a global transportation hub, [would] be lost in favor of proceeding in West Virginia, where the transportation and other logistical options are vastly more restrictive and costly.”

The company also notes, “Notably, many of the debtors’ contracts are governed by New York and not West Virginia law, including virtually all of the debtors’ pre-petition debt instruments [and] almost two-thirds of their sales contracts.”

Indeed, the company argued, these factors made New York the location of choice for many large corporate bankruptcies, even when “their headquarters and assets are primarily located outside the jurisdiction,” specifically citing the Chapter 11 cases of Lyondell ChemicalBoston GeneratingGeneral Motors,Chrysler, and Northwest Airlines.

“A principal reason why venue in those cases was appropriate – and why it is appropriate here for the efficient administration of the estate,” the company argued, “is that experience has shown that the most frequent attendees at court hearings – by far – are the debtors’ professionals, the lenders’ professionals, and other material counterparties and their professionals, almost all of whom are located in New York in this case.”

The company acknowledges that there are other creditors and stakeholders in the case outside of New York, but even for these creditors New York would be a more convenient place for them to attend hearings than West Virginia, Patriot Coal argues.

As for the company’s employees and retirees in West Virginia, Patriot Coal said the union “overstates the importance of the location of employees and retirees,” arguing, “It is not expected that more than a handful of employees or retirees would ever need to be present in this court,” and, “To the extent that union members – or any interested individuals – wish to monitor the proceedings, well-established technology will allow them easily and conveniently to do so.”

In addition to the company and the creditors’ panel, objections to changing venue were filed by several of the company’s creditors, as well as the company’s DIP lenders.

A hearing on whether to transfer venue is scheduled for Sept. 11. – Alan Zimmerman

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Japan’s Daikin to buy Goodman Global for $3.7B

Japan’s Daikin Industries early today announced it agreed to acquire Goodman Global, a manufacturer of HVAC products, from Hellman & Friedman for $3.7 billion.

Market participants expect that Goodman Global’s loans will be repaid in connection with the transaction, which Daiken said is expected to close in the fourth quarter. Goodman Global had about $1.4 billion outstanding under its first-lien term loan and $175 million under its second-lien as of June 30, sources said.

Daikin develops, manufactures, sells and provides aftermarket support of HVAC equipment and systems, refrigerants and other chemicals, as well as oil hydraulic products. The company said it plans to finance the transaction through a combination of internally generated funds, public policy financing, straight bond issuances and bank loans.

Hellman & Friedman acquired Goodman Global in 2008. The company’s existing loans date back to October 2010, when the company placed a  first- and second-lien dividend recapitalization financing via J.P. Morgan, Barclays, Deutsche Bank and GE Capital.

At closing, that dividend recap was structured as a $1.5 billion, six-year first-lien term loan, which cleared the market at L+400, with a 1.75% LIBOR floor and a 98 offer price; a $275 million, seven-year second-lien term, which cleared at L+700, with a 2% floor and a 98 offer price; and a $250 million, five-year revolving credit. The first-lien term loan had been covered by a 101 soft call premium in the first year, while the call schedule on the second-lien is 103, 102, 101 in years 1-3, respectively. – Kerry Kantin

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CLO resurgence continues in 2012 despite expectations for slowdown

The widely expected summer slowdown in CLO issuance is proving less severe than many participants feared.

After CLO issuance averaged $3 billion a month in the first half of the year, managers printed $1.8 billion of new vehicles in July and another $1.9 billion during the first half of August, when ING Asset ManagementHalcyonSymphony, American Capital Strategies, HighbridgeFranklin Advisers, andTICC Capital put deals on the board. That brings year-to-date volume to $22 billion, which is the highest annual figure since 2007. For reference, $12.3 billion of deals printed in all of 2011.

Looking ahead, managers say the calendar is chock full of deals. However, whether this pipeline translates into strong volume during the final stretch of 2012 depends on several factors that ultimately dictate model returns.

On the liability side, the critical component is senior liabilities. After collapsing to a mere handful of buyers in recent months in response to market jitters, managers say a broader base of AAA investors is necessary to bring down funding costs and expand deal capacity.

Looking ahead, managers say they are seeing hopeful signs for increased AAA demand. In addition to demand from traditional investors such as Japanese banks, sources say arrangers are also seeing interest from U.S. regional banks – many of which have a natural affinity for the product because they obviously understand the collateral – as well as corporate pension funds.

That said, AAA spreads have been stuck in the mud in recent weeks even as loan spreads have tightened considerably. For example, the AAA tranche of GSO/Blackstone’s July 11 deal printed at a discount margin of L+150. About four weeks later, ING Alternative Asset Management, another seasoned CLO 2.0 issuer, priced its AAAs at a DM of L+153.

By comparison, new-issue loan yields tightened significantly during the same period (see below for details), and managers have voiced concern that there will not be sufficient new-issue volume to keep CLO arbitrage at levels attractive to equity investors – typically 15%, give or take.

The prospects for post-Labor Day volume are decent, arrangers say. For one thing, as long as the window remains open, they expect issuers to continue to push through perennially popular dividend-related loans. Certainly, that has been the case lately.



Also, the pace of LBO deal-making has clearly picked up in recent months, pushing the calendar of M&A-related loans to $12.4 billion on Aug. 15, from $7.7 billion at the end of July.

Add it all up, and the signs look positive for CLOs to finish the year strong and push to the wide end of strategist expectations of $20-30 billion. Of course, that assumes that macro events do not intrude again, driving investors to the sidelines and keeping new-issue loan volume at bay. Certainly, that has been the tale of the tape over the past 36 months, keeping the post-credit-crunch recovery from turning into a full-blown bull market.

Another potential issue – especially for unaffiliated managers without the capital to assemble portfolios – is the relatively steep cost of warehouse lines, which managers say is typically L+125-175, with a 20-30% first-loss requirement and tight liquidations terms. The warehouse issue is particularly nettlesome when supply is scarce – as it has been lately – because managers and equity investors are forced to ramp up over a longer period, leaving them exposed to market turns.

CLOs by the numbers
In addition to the volume trends above, 2012 has brought a noteworthy increase in the number of managers that have inked new deals. Better access to open-market equity and warehousing lines has allowed a broader number of players into the game. In all, 43 managers have inked a deal this year, the most since 2007, up from 28 in all of last year.

From a structuring standpoint, the big theme is longer reinvestment periods. On average, regular-way 2012-model deals can reinvest for 3.5 years, compared to 3.2 years in 2011.

Other stats are little changed, including average AAA and equity as a percent of overall funding:

And the average components of CLO baskets:

– Steve Miller