Vantage Drilling bonds drop amid restructuring discussions

Debt backing Vantage Drilling dropped several points today after the company said in a presentation at the Deutsche Bank conference on Tuesday that, along with financial advisors Lazard and Weil, it is “discussing possible restructuring scenarios with large debtholders in order to strengthen the company’s balance sheet and reduce interest burden.”

The 7.5% secured notes due 2019 traded at fresh lows in small clips of 25 on Wednesday, from a single trade in a 32.5 context Tuesday morning, trade data show.

Also of note, the issuer’s term loan due 2017 (L+400, 1% LIBOR floor) and the longer-dated term loan due 2019 (L+450, 1.25% floor) are now trading on top of each other and are both quoted around a 33/35 market, according to sources. The loans on Friday were marked around 33/35 and 32/34 respectively, and prior to news that an ongoing bribery investigation had culminated in the cancelation of a valuable Petrobras drilling contract, the loans had been quoted with a 10 point differential, sources say. See “Vantage Drilling bonds, loans tumble on Petrobras contract loss”, LCD News, Sept. 3, 2015 and “Vantage Drilling bonds trade lower after co. retains Lazard,” LCD News, Jun 22, 2015.

As reported, Vantage in June retained Lazard “to evaluate financing opportunities, strengthen and expand management’s analysis of the changing marketplace and provide an independent resource for evaluating the company’s strategic plans.”

Houston, Texas-based Vantage Drilling was last in market in March 2013 with $775 million of 7.125% secured notes via a Citi-led bookrunner sextet. Pricing was at the tight end of talk, at par, and proceeds helped the issuer pay down costly pari passu 11.5% notes. – Rachelle Kakouris




Standard & Poor’s cuts ratings on Prospect Capital, outlook stable

Standard & Poor’s Ratings Services cut ratings on Prospect Capital, citing weaker capital, leverage, and earnings metrics than sector peers and expectations that the company will continue to operate with relatively “higher portfolio risk” away from its core lending portfolio.

Standard & Poor’s cut the issuer and the unsecured debt ratings to BBB-, from BBB. The outlook is stable, in part due to an expected debt-to-equity ratio of less than 0.85x moving forward.

“Prospect Capital Corp.’s (PSEC) capital, leverage, and earnings metrics have been weaker relative to similarly rated peers over several quarters,” Standard & Poor’s analyst Olga Roman said in a Sept. 29 research note.

“Additionally, we have changed our expectations regarding the reduction of portfolio risk based on updated management guidance on the potential size of the spin-offs of certain businesses.”

Prospect Capital management plans to sell certain operations, including its CLO structured credit business, online lending, and real estate business, or roughly 10% of the company’s asset base. Standard & Poor’s had expected a larger share of spin-offs.

Prospect Capital’s largest investment holding as of June 30 was National Property REIT Corp. (NPRC), whose portfolio consisted of multifamily properties, commercial properties, and consumer online lending portfolios.

After NPRC, Prospect’s top five investments accounted for 56% of its adjusted total equity (ATE) in the last 12 months ended June 30. The share should decline to below 50% due to expected syndication of these investments.

“Although our assessment of the company’s capital, leverage, and earnings (CLE) and risk position remain unchanged, the above mentioned factors resulted in a negative one notch comparable ratings adjustment.”

Prospect Capital’s debt-to-equity was 0.81x, and asset coverage was 228% as of June 30.

“The stable rating outlook reflects our expectation that PSEC will continue to operate with debt to equity below 0.85x and will improve its realized return on average portfolio investments above 5% and its non-deal-dependent income coverage of both interest and dividend above 1x,” Roman said.

As of June 30, Prospect Capital’s investment portfolio totaled $6.6 billion, covering 131 portfolio companies, and was generating an annualized yield of 12.7%.

“Our ratings on PSEC also reflect the company’s “adequate” business position, based on its market position as the second-largest externally managed BDC; its focus on senior secured investments; and its relatively diversified portfolio.”

Prospect Capital, a BDC, lends to and invests in privately held middle-market companies. Shares trade on the Nasdaq under the ticker PSEC. – Abby Latour

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New Capital Southwest BDC to stand out by geography, partnership

It is not lost on Capital Southwest’s management that they are latecomers in the credit cycle to the increasingly crowded playing field of middle-market lending.

The company is undergoing a transformation that will create two publicly traded entities: an internally managed BDC that will focus on lending to middle-market companies and retain the Capital Southwest name, and a diversified growth company called CSW Industrials.

Shareholders of Capital Southwest will receive stock in CSW Industrials as a tax-free dividend. Shares in CSW Industrials are due to begin trading on Oct. 1 on NASDAQ under the ticker symbol CSWI. The company split was unveiled in December 2014.

On the eve of the transaction, management says they are prepared for the challenges.

“We wake up every morning with the worry about entering late in the credit cycle,” Bowen Diehl said. Diehl, the company’s chief investment officer hired in early 2014, will become CEO of the new Capital Southwest. Michael Sarner, hired in July, will become CFO following the spin-off. Both Diehl and Sarner previously worked at American Capital. “But we’re buyers of assets, so maybe the sell-off will take some of the froth out of the market.”

At least initially, the Dallas-based company will use geography to differentiate itself, originating most of transactions from a network of relationships in the southwest and southern U.S. Although Texas-based, they have little energy exposure among legacy equity investments.

They plan to assemble a granular credit portfolio across asset classes and industries.

To execute their plan, Capital Southwest announced a partnership this month with rival BDC Main Street Capital, based in Houston. Capital Southwest will initially inject $68 million into the joint-venture fund, and Main Street, $17 million. Capital Southwest will own 80% of the fund, and share in 75.6% of profits. Main Street will own 20%, and have a profits interest of 24.4%.

“Main Street has a robust and well-established origination platform in first-lien syndicated credits. To develop that, we’d have to hire three to four people. We think this is a win-win for shareholders of both Capital Southwest and Main Street,” said Diehl in an interview.

In January, Capital Southwest hired Douglas Kelley, who had been a managing director in American Capital’s sponsor finance practice for middle market companies. In June, Capital Southwest announced the hiring of Josh Weinstein from H.I.G. WhiteHorse, to source direct-lending and middle-market syndicated credits. Capital Southwest also expanded their team with the hiring of a couple of associates.

Thus, Capital Southwest’s team is largely set for the near term.

As part of the transition, Capital Southwest has divested $210 million of equity investments in the past 15 months, realizing $181 million of capital gains. In the future, equity exposure in the investment portfolio will be capped at 10-15%.

“We are no longer a buy-and-hold-indefinitely investment company,” said Diehl.

The company has already begun to ramp up the new credit portfolio, investing $42 million in eight middle-market credit investments.

Among these investments are a $7 million, second-lien loan (L+875) to data collection company Research Now; a $7 million second-lien loan (L+925) to Boyd Corp.; a $5 million second-lien loan (L+800) to retailer Bob’s Discount Furniture; and a $5 million second-lien loan (L+775) to Cast & Crew Entertainment Services. New credit investments include a direct loan to Freedom Truck Finance, as a $5.4 million last-out senior debt (P+975), and industrial supplier Winzer, as $8.1 million, 11% subordinated debt.

Capital Southwest’s credit portfolio will eventually be middle-market loans roughly balanced between lower-middle-market companies generating EBITDA of $3-15 million, and upper-middle market companies generating EBITDA of more than $50 million.

The company’s largest legacy equity investment is Media Recovery, which is the holding company of ShockWatch. The Dallas-based company manufactures indicators and recording devices to measure impact, tilt and temperature during transit. The fair value of the equity investment was roughly $30 million as of June 30.

Setting up the Main Street joint venture early in the transformation process has been positive. Moreover, Capital Southwest has $105 million of cash to investment after the $68 million committed to the Main Street joint venture.

“We are focused on strong credits. We are not in a hurry to put cash to work, but rather thoughtfully constructing a portfolio which produces a consistent market dividend for our shareholders,” said Sarner, CFO of the new company. –Abby Latour

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Ascensus to be acquired by Genstar, Aquiline

Middle-market private equity firms Genstar Capital and Aquiline Capital Partners have teamed up to buy Ascensus from J.C. Flowers & Co., according to a statement. The acquisition is subject to regulatory approvals and other customary closing conditions and is expected to wrap up in the fourth quarter.

Ascensus has existing loans that date to a November 2013 placement via lead arrangers BMO Capital Markets and Golub Capital. At the time Ascensus issued a $200 million first-lien term loan due 2019 (L+400, 1% LIBOR floor) and a $92 million second-lien term loan due 2020 (L+800, 1% floor).

Existing facility ratings are B/B1 on the first-lien debt and CCC+/Caa1 for the second-lien debt. Current corporate ratings are B/B2.

Dresher, Pa.-based Ascensus provides retirement services, including record-keeping and administrative services, supporting more than 40,000 retirement plans and 3.3 million 529 college savings accounts. It also administers more than 1.5 million IRAs and health savings accounts. – Jon Hemingway



Concordia sets London, NY meetings this week for cross-border leveraged loan

Goldman Sachs, Credit Suisse, Jefferies, and RBC Capital Markets have set lender meetings in New York and London this week to launch their cross-border loan financing backing Concordia Healthcare’s roughly $3.5 billion acquisition of Amdipharm Mercury Limited (AMCo).

The seven-year covenant lite institutional debt includes a $1.1 billion U.S. dollar term loan B, set to launch with a meeting on Thursday, Oct. 1 at 10 a.m. EDT, and a £500 million (roughly $759 million) sterling term loan B, launching with a lender meeting on Wednesday, Sept. 30 at 9:30 a.m. BST, sources said.

Altogether, arrangers have provided $4.3 billion of credit facilities and bridge commitments to finance the acquisition, and refinance all of AMCo’s outstanding loans. As noted earlier, Concordia will pay £800 million in cash for the acquisition and provide Cinven with 8.49 million of its own common shares. This will leave the private equity firm with a 19.9% stake in Concordia.

The bonds are expected to total round $950they  million, sources said. Of note, Concordia’s existing 7% notes include a 3.5x first-lien incurrence test, so leverage through the loans will be less than that cap.

Concordia today has roughly $575 million of institutional loans and AMCo has £500 million already, so the new money raise is only about $500 million, all in dollars, sources noted.

AMCo was formed through the merger of Mercury Pharma and Amdipharm, which were acquired by Cinven in August and October 2012, respectively. AMCo is an international specialty pharmaceuticals company, focusing on off-patent products. –Chris Donnelly/Nina Flitman


Albertson’s/Safeway, prepping for IPO, eyes potential refinancing

Albertson’s disclosed in an updated regulatory filing tied to its proposed initial public offering that it has held preliminary discussions with potential lenders, financial intermediaries, and advisors about a refinancing of its loans. The refinancing would include a new $4 billion asset-based loan agreement, new term debt, and new senior unsecured notes, according to the filing.

Underwriters on the IPO include Goldman Sachs, Bank of America Merrill Lynch, Citigroup, Morgan Stanley, Deutsche Bank, Credit Suisse, Barclays, Lazard, Guggenheim, Jefferies, RBC, Wells Fargo, BMO Capital Markets, SunTrust Robinson Humphrey, and others.

Albertson’s intend to use the net proceeds from the equity offering to repay all amounts outstanding under the new Albertson’s term loan, including $845.7 million of principal, plus accrued and unpaid interest; to redeem $243.8 million of ABS/Safeway notes at a redemption price of 107.750%, plus accrued and unpaid interest; to pay fees and expenses; with remaining amounts used to reduce Albertson’s term debt, which totaled $6.084 billion as of June 30.

Last year’s $9 billion merger of Cerberus Capital Management-controlled Albertson’s with Safeway was backed by financing commitments from Credit Suisse, Bank of America Merrill Lynch, Citigroup, Morgan Stanley, Barclays, Deutsche Bank, PNC Bank, US Bank, and SunTrust Robinson Humphrey.

Loan financing for the deal included a $3.609 billion, seven-year B-4 term loan (L+450, 1% LIBOR floor), that was later increased via a $300 million add-on, and a $950 million, five-year amortizing B-3 term loan (L+400, 1% floor). Both loans included 12 months of 101 soft call protection. – Staff reports


Poll shows 81% of middle market leaders mulling M&A over next 3 yrs

In a survey of nearly 700 leaders of privately owned middle market companies, 81% say they are interested in some form of M&A activity over the next three years.

Middle market investment bank Harris Williams & Co. partnered with Inc. to carry out the survey, for which owners, partners, and managers at middle market companies were questioned about future growth plans.

Asked about choice of a potential buyer, the preferred choice was for a public or private corporation that is a strategic buyer. The second ranked response was split between a private equity firm and employees.

“M&A is top of mind for high-growth companies and new, high-quality assets will continue to come to market as these companies explore their options for the next phase of the business,” the survey results said.

“With the current M&A market at its strongest since 2007, the supply of high-quality companies coming to market continues to show great promise. While some business leaders intend to buy or merge with another company to drive further growth, 51.8% indicated that they anticipated selling their business.”

Of the respondents, 25% said they have a detailed exit strategy planned. The largest group, or 43%, reported that their strategy was still evolving, and 30% said they did not yet have one, the survey said. – Abby Latour

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