JC Penney Eyes $2B Leveraged Loan to Refinance Existing Debt

J.P. Morgan has scheduled a lender meeting on Wednesday at 10 a.m. EDT to launch a term loan of up to $2 billion for J.C. Penney, sources said.

Source: Wikipedia

Proceeds of the seven-year term loan will be used to refinance the retailer’s existing real estate term loan. The loan is talked at L+450–475, with a 1% LIBOR floor, offered at 99. The loan will include six months of 101 soft call protection. At current talk, the loan would yield roughly 5.8–6.07% to maturity.

Investors are being told to expect a B/B3 issuer profile and B+/B1 loan ratings, according to sources.

The real estate term loan due 2018 totaled $2.194 billion at year-end 2015. Current pricing is L+500, with a 1% floor. The real property subject to mortgages under the term loan credit facility includes the company’s headquarters, distribution centers and certain of its stores. — Chris Donnelly

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Bankruptcy: Vertellus Files Ch. 11; Lenders to Buy Assets for $454M Credit Bid

Vertellus Specialties existing term loan lenders have agreed to purchase substantially all of the company’s U.S. and international assets for a credit bid of $453.8 million, the company announced this morning.

To implement the transaction, which will take place under Section 363 of the Bankruptcy Code, the company filed for Chapter 11 in bankruptcy court in Wilmington, Del.

The term lenders are Black Diamond Capital Management, Blackrock, BlueBay Asset Management, Brightwood Capital Advisors, and TPG Special Situations Partners, court filings show.

The company said the proposed sale would be subject to higher offers, with the deal with term lenders serving as a stalking-horse bid. The agreement carries a 3% break-up fee, plus expense reimbursements, as stalking-horse protections.

The company said in a letter to employees that it expects the sale process would take 3–4 months. In its motion for approval of bidding procedures, the company asked the bankruptcy court to schedule a bid deadline of Aug. 15, an auction date of Aug. 18, and a sale hearing for Aug. 23.

The Chapter 11 filings do not include the company’s international entities in Belgium, the U.K., India and China, although those entities are included in the sale process, the company said.

The Chapter 11 case also does not include Elma, Wash.–based Vertellus Performance Chemicals, the legal entity containing the company’s sodium borohydride business, which has separate financing agreements in place. Furthermore, Vertellus Performance Chemicals is also not included in the agreement with lenders and will remain under the ownership of Wind Point Partners.

In connection with the Chapter 11 filing, the existing lenders have also committed to provide $110 million in DIP financing “to ensure continuity through the sale process.” Interest under the facility is at L+900, with a 1% LIBOR floor.

The DIP milestone deadlines require the sale to be completed within 100 days of interim approval of the DIP. Assuming that occurs tomorrow, the deadline would be Sept. 9.

In court filings, the company explained that it had “fallen victim to certain macroeconomic forces recently afflicting the chemical manufacturing industry. Specifically, the debtors’ VAN business division [Vertellus Agriculture and Nutrition Specialties unit] operates in a highly competitive industry, and has faced a slowing of growth rates for its pyridine and picoline products, coupled with significant increases in global capacity and production, primarily from Chinese manufacturers of VAN’s primary products.”

According to a declaration filed in the case by Philip Gillespie, the company’s CFO, the company has “begun significant realignment in the supply chain and rationalization of overall business cost structure in order to mitigate these effects. These long-term efforts are expected to assist with decreased overhead, manufacturing and supply chain costs, greater margin protection and potential new revenue streams over a period of years, all of which are intended to reduce the debtors’ exposure to sustained price volatility.”

However, the company said, beyond the competitive environment it also faced liquidity constraints due to “the burden of legacy environmental and pension liabilities” and the company’s “capital structure and debt load.”

The capital structure includes a first-lien term loan, which is not included in the S&P/LSTA Leveraged Loan Index, with roughly $471 million outstanding, and a first-lien revolver with about $82 million outstanding, including $19 million with respect to certain undrawn letters of credit, court filings show. Annual principal and interest payments under the facility were $52 million.

As reported, the company skipped an interest payment in April, prompting S&P Global Ratings to downgrade the company’s corporate credit and issue level to D, from CCC

The company also said it has about $25 million in trade claims outstanding, including about $10 million that may be entitled to administrative expense priority. — Alan Zimmerman

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LMA to EC, Parliament: No, actively-managed CLOs aren’t bad; Yes, CLOs are Regulated

The Loan Market Association has written a letter in response to a recent Q&A between the European Commission and European Parliament. The LMA letter highlights an inaccuracy in the response to one of the questions, as well as once again advocating that the fact that CLOs are actively managed transactions should be viewed as a positive when they are being assessed for suitability as STS transactions.

The questions were submitted by Roberto Gualtieri, chairman of the EP’s Committee on Economic and Monetary Affairs (ECON), as part of the Parliament’s work on the STS regulation. The corresponding responses were tabled by the European Commission’s Lord Hill, who initiated the Capital Markets Union project.

The specific question referenced in the LMA’s letter — number 41 — relates to CLOs, and asks about the potential benefits and risks regarding their eligibility for inclusion as STS securities.

The response notes that the main benefit was the ability of the CLO to create a bridge between capital markets and firms, but then goes on to highlight several negatives. Those include the active management aspect of a CLO, and the fact that ‘CLOs managers are alternative funds and as such they are not subject to prudential capital requirements like banks or MIFID institutions.’

With regards to the first point about active management, the LMA has long since lobbied against this negative perception of an actively managed vehicle.

And the second point referring to CLOs not being regulated is based on a CLO Primer written by Andreas Jobst in 2002. As such it pre-dates both the CRR and MiFID regime, and more importantly is inaccurate. “CLO managers are regulated entities under MiFID, AIFMD or an equivalent third country regulator,” notes the LMA’s Nicholas Voisey, managing director.

Voisey continues, “We are concerned that policy is being drafted based on inaccurate and historical information, despite the work of the industry to educate policy makers. We note particularly the reference to the CLO primer dated December 2002. Further, we believe a manager adds expertise to a transaction, monitoring the portfolio, and adding in-depth and independent credit analysis on each asset. The CLO manager has knowledge and experience in corporate credit and represents the CLO on creditor committees and in any workout scenario so facilitating corporate recovery and preserving jobs.” — Sarah Husband

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US Leveraged Loan Funds see 3rd Cash Inflow in Last 4 Weeks

U.S. leveraged loan funds recorded a net inflow of $63 million in the week ended May 25, according to Lipper. This cuts roughly in half the outflow of $139 million last week and is the third one-week inflow over the past four weeks, for an infusion of $311 million over that span.

loan fund flowsTake note, however, that today’s reading was all ETFs, at positive $67 million on top of outflows of $4 million from mutual funds. Last week was a bit deeper, with mutual fund outflows of $147 million patched by $8 million of ETF inflows.

The trailing-four-week average is fairly steady, at positive $78 million, from positive $43 million last week and positive $55 million two weeks ago.

Year-to-date outflows from leveraged loan funds are now $5 billion, with an inverse of negative $5.3 billion mutual fund against positive $255 million ETF. A year ago at this juncture, it was similarly mostly mutual fund outflows, at $3.1 billion, versus a small inflow of $83 million to ETFs, for a net negative reading of approximately $3 billion.

The change due to market conditions this past week was minimal, at positive $181 million, or about positive 0.3%, against total assets, which were $61.4 billion at the end of the observation period. ETFs represented about 10% of the total, at $6 billion. — Matt Fuller

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Leveraged Loan Covenant Restrictions Ease as Market Continues to Strengthen

Amid better technical conditions, leveraged leveraged loan covenant restrictions have loosened in the second quarter. The average free-and-clear tranche of covenant-lite institutional loans, for example, has expanded to a one-year high of 0.69x EBITDA since April 1, from 0.66x in the first quarter.

free and clear tranchesFree-and-clear tranches are tranches that allow companies to issue debt without triggering financial incurrence tests (you can learn more about this type of debt in LCD’s free Primer/Almanac).

Covenant Review observes that many other loan terms—including most-favored-nation protections, restricted payment baskets, and caps on EBITDA adjustments—have also shifted in a more issuer-friendly direction in recent months, though in general documents are still tighter than they were in early 2015, when muscular conditions prevailed.

This development follows similar trends at play in new-issue clearing spreads, secondary loan prices, and the recent reemergence of opportunistic deal flow. Looking ahead, managers expect issuers to continue to leverage today’s strong loan demand to command more favorable covenant treatment.

Covenant Review will introduce in early June a monthly report that puts a lens on benchmark statistics for loan covenants, cutting the data by rating, sector, and sponsor where appropriate. – Steve Miller

Steve is CEO of CR Holdco LLC, and until recently supplied most of the many baseball analogies found in LCD’s leveraged loan analysis.

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Seven Leveraged Loan/High Yield Issuers Join LCD’s Restructuring Watchlist

Seven debt issuers joined LCD’s Restructuring Watchlist last week, bringing the total number of entities on the list to 44.

The Watchlist tracks companies with recent credit defaults or downgrades into junk territory, issuers with debt trading at deeply distressed levels, as well as those that have recently hired restructuring advisors or entered into credit negotiations. It is compiled by LCD’s Matthew Fuller and Rachelle Kakouris.

Joining the Watchlist last week:

  • Communications software concern Avaya , which hired GS and Centerview to address capital structure issues
  • Oil exploration & production co. EXCO Resources, which hired Akin Gump as legal advisor, and said it will retain a financial advisor
  • Halcon Resources, another E&P firm; it inked a restructuring agreement via Chapter 11
  • Luxembourg-based Satellite concern Intelsat, which recently lowered the price on the co.’s bond buyback
  • Internet radio concern iHeartMedia , which is negotiating a debt buyback (and reportedly is hiring advisors)
  • Stone Energy, which skipped a coupon payment
  • Calgary-based oil waste concern Tervita, which deferred an interest payment

distress ratio

It will be no surprise to learn that, of the 44 issuers on the Watchlist, 18 hail from the energy/O&G sectors, with another three in the mining/commodities space. – Tim Cross

The Restructuring Watchlist is published each week in LCD’s Distressed Weekly. You can follow LCD on Twitter or learn more about us here. LCD is an offering of S&P Global Market Intelligence


TransDigm Readies Syndication of $950M Leveraged Loan

A Credit Suisse–led arranger group has scheduled a lender call today at noon EDT to launch a $950 million F term loan for TransDigm, sources said. Proceeds are earmarked to fund the acquisition of Data Device Corporation (DCC) and for general corporate purposes.

Price talk on the seven-year covenant-lite loan has been set at L+300–325, with a 0.75% LIBOR floor and a 99 offer price ahead of the call. At talk, the loan would yield 3.98–4.24%. Lenders are being offered 12 months of 101 soft call protection.

The $950 million TLF includes a $450 million delayed-draw tranche and $500 million funded tranche.

The borrower is also seeking lender consents to an amendment to increase the incremental capacity in the existing credit agreement. In connection with the transaction, the spread on the TLE will step up by 25 bps, to L+300.

Existing lenders are being offered an amendment fee of five basis points. Delayed-draw lenders, meanwhile, are being offered a ticking fee that would kick in after 30 days with the full spread plus LIBOR floor.

Commitments are due Thursday, June 2.

Credit Suisse is joined by Morgan Stanley, UBS, Citi, Credit Agricole, Goldman Sachs, Barclays, RBC Capital Markets, and HSBC.

As of April 2, there was $1.525 million outstanding under the TLE, $2.025 billion outstanding under the company’s TLC due February 2020 (L+300), and $811 million outstanding under the company’s TLD due June 2021 (L+300), regulatory filings show. The company also has a $550 million revolver.

As reported, TransDigm is also in market with a $950 million, 10-year (non-call five) subordinated notes offering via joint bookrunners Morgan Stanley, Credit Suisse, Citi, UBS, Barclays, Credit Agricole CIB, Goldman Sachs, HSBC, and RBC. An investor conference call has been scheduled at 10:30 a.m. EDT today, with pricing to follow. Proceeds will be used to fund the acquisition of DCC, and for general corporate purposes, including potential acquisitions and/or dividend.

TransDigm supplies engineered components for commercial and military aircraft. The company trades on the New York Stock Exchange under the ticker TDG. Corporate issuer ratings are B/B1. — Richard Kellerhals/Luke Millar

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Versa Media Capital nets $100M financing from Crayhill Capital

Versa Media Capital received a $100 million financing facility from Crayhill Capital Management.

Versa Media Capital is a newly formed company that will provide bridge financing for independent film and television production, as well as mezzanine, gap, and tax credit loans. The team expects to structure and close financing for 15–20 projects per year.

The company was founded by Jeff Geoffray, Jeffrey Konvitz, and Daniel Rainey.

Geoffray co-founded film financing company Blue Rider Finance, which underwrote and financed over 70 transactions on films with over $700 million in production costs. Konvitz is an entertainment attorney. Rainey is a private equity investor and attorney.

New York–based Crayhill Capital Management is an alternative-asset-management firm. — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.


Linn Energy Delisted from NASDAQ; LinnCo Exchange Offer Extended

Linn Energy said yesterday it received notice that it and LinnCo would be delisted from trading on NASDAQ, as of today’s open.

The company said that the two companies are expected to begin trading on the OTC Pink Sheets marketplace today under the symbols LINEQ and LNCOQ, respectively.

Separately, the company also said yesterday it had extended its offer to exchange Linn units for shares in LinnCo, to 12 a.m. EDT on June 30. The terms of the exchange have not changed.

As reported, the exchange offer’s purpose is to permit holders of Linn units to maintain their economic interest in Linn through LinnCo, an entity that is taxed as a corporation, rather than a partnership, which may allow Linn unitholders to avoid future allocations of taxable income and loss, including cancellation of debt income that could result from the Chapter 11.

Roughly 12.07 million shares have been exchanged so far, representing about 69% of Linn Energy’s outstanding units, the company said. — Alan Zimmerman

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Ares Capital grows even bigger with $3.4B American Capital purchase

Two of the largest listed BDCs are merging to form a middle market lending behemoth that will have $13 billion in investments (at fair value). The largest, Ares Capital (ticker: ARCC), announced yesterday that it’s buying American Capital (ticker: ACAS) for $3.4 billion.

The purchase will put even more miles between ARCC and its nearest competitor, now Prospect Capital (ticker: PSEC), which has $6.2 billion in assets against ARCC’s $9.3 billion. The ACAS portfolio will give ARCC another $4.7 billion in investments and expand the number of portfolio companies to 385 from 220.

With the purchase, ARCC will gain scale and flexibility to underwrite larger commitments to compete against traditional banks. Last year’s financing for American Seafoods Group whetted ARCC’s appetite for bigger names. After all, bigger deals generate bigger underwriting and distribution fees. ARCC underwrote an $800 million loan for American Seafoods, snagging a mandate that typically would’ve gone to large banks.

ARCC management yesterday said that it wants the ability to extend commitments of $500 million to $1 billion for any one transaction, with the aim of holding $250 million, whereas before ARCC would go as large as $300 million, with the aim of holding $100 million.

The ACAS purchase also will give ARCC more breathing room under its 30% non-qualifying bucket to ramp its new joint-venture fund with Varagon. The Varagon platform is replacing ARCC’s joint-venture with GE Capital, which began to wind down last year in the wake of GE Capital asset sales.

The boards of directors of both companies have unanimously approved the acquisition.

The purchase requires shareholder approvals and is contingent on the $562 million sale of ACAS’s mortgage unit to American Capital Agency (ticker: AGNC) in a separate transaction.

Elliott Management, holder of a 14.4% interest in American Capital, strongly supports the transactions and will vote its shares in favor.

Ares Management agreed to an income-based fee waiver of up to $100 million for the first ten quarters after closing.

The combined company will remain externally managed by Ares Capital Management LLC, and all current Ares Capital officers and directors will remain in their current roles.

ACAS will continue with planned asset sales ahead of closing, in collaboration with Ares. ACAS hired Goldman Sachs and Credit Suisse in January to vet buyers. Since March 31, ACAS has announced sales of over $550 million in balance sheet investments. In addition to the mortgage business, ACAS is looking to sell its European Capital assets. — Kelly Thompson/Jon Hemingway