Staples Credit Default Swap Cost Climbs on Word of LBO Effort

The cost to buy debt protection on bonds backing Staples gapped higher today, after Thomson Reuters reported that private equity firm Sycamore Partners was in advanced negotiations to acquire the troubled office-supplies retailer, pending the finalization of a debt-financing package.

Five-year CDS referencing Staples’ slim stack of bonds lurched up by 35 bps, or roughly 13%, in the biggest move higher today among CDS IG 28 constituent names. The latest indications, at 305 bps, are 60 bps wider since the start of June, and more than 100 bps wider since the company in early April revealed plans to explore a sale to private-equity interests.

Sycamore’s bid, which could be announced north of $6 billion as early as next week, apparently trumped one floated by Cerberus Capital Management, according to the report. For reference, Staples’ total enterprise value of just over $5.4 billion as of April 29 includes a net cash position, on $1.05 billion of total debt and nearly $1.3 billion of cash and short-term investments, according to S&P Global Market Intelligence.

Staples’ debt exposure is almost entirely from its two long-term debt issues, including the $500 million each of its 2.75% notes due Jan. 12, 2018 and 4.375% notes due Jan. 12, 2023, both of which date to issuance in January 2013. The company repaid its $2.5 billion B term loan last spring after regulators blocked its proposed $6.3 billion merger with Office Depot. The 4.375% 2023 issue traded this morning at roughly 102.25, according to MarketAxess.

Notably, both bond issues are subject to change-of-control puts at 101, should an M&A event force ratings below the investment-grade threshold by S&P Global Ratings and Moody’s.

At present, Staples is rated BBB–/Baa2, including a negative outlook at S&P Global Ratings and a stable outlook at Moody’s. Fitch rates the company below the IG line at BB+, with a stable outlook, following a downgrade in April 2016 predicated on the secular headwinds that prompted the ill-fated merger ambitions of Staples and its most direct retail analogue.

Operational struggles have been plain since the financial crisis, and were punctuated in March 2014, when the retailer chilled the credit markets with weaker-than-expected fourth-quarter sales, and attendant plans to shutter 225 stores in North America. From peak operating cash flow of more than $2 billion in 2009, Staples’ LTM operating cash flow slid to $1.6 billion in fiscal 2012, $1.2 billion in fiscal 2013, less than $1 billion in fiscal 2016, and $916 million over the latest LTM period to April 29, according to S&P Global Market Intelligence.

Its five-year CDS was indicated at roughly 250 bps both immediately after the regulatory blockade of the Office Depot merger and after the 2014 sales warning. This morning’s CDS reading is also roughly double the interim lows recorded in the summer of 2015, trade data show. — John Atkins

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This story is taken from analysis which first appeared on, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.


Valeant Debt Falls, Default Protection Cost Widens as Drugmaker Slashes Guidance

High yield bonds backing Valeant Pharmaceuticals fell as much as four points in the London session before retracing some losses after the Canadian drugmaker cut its 2016 guidance for a third time, reflecting in part what it said was “the impact of significant disruption…faced over the past nine months.”

ValeantThe short-tenor 6.75% notes due 2018 slumped two points, to 95/96 early in the session, but recovered a bit, with the most recent block trades at 97, according to sources and trade data. The company’s 5.875% notes due 2023 and 6.125% notes due 2025—tied for the eighth-largest single tranches ever sold, at $3.25 billion apiece—were both super active in the low 80s, but bounced off lows as short-sellers covered quick trades. Sources relay low quotes of 81/82 and 79.5/80.5, respectively, but a mild recovery is underway, with recent prints at 82.75 and 81.75, trade data show.

The €1.5 billion issue of 4.5% notes due 2023 dropped four points to 74–75, from 78 before the announcement. The notes have since bounced back to 78 as U.S buyers stepped in, according to sources.

Over in derivatives, five-year CDS in the name widened roughly 9% this morning, to 9.5/11.5 points upfront, according to Markit. While about $87,500 more expensive today, at approximately $1.05 million at the midpoint upfront payment, in addition to the $500,000 annual payment, to protect $10 million of Valeant bonds, it’s still a bit cheaper than the record wides of 13.5 points upfront in mid-April.

The company’s equity, which trades on the NYSE under the ticker VRX, plunged 31% to $22.53. The company’s stock has lost more than 90% of its value from its August 2015 peak.

Over in the leveraged loan market, the pharmaceutical concern’s loans softened on the news, with the TLF due 2022 (L+425, 0.75% LIBOR floor) marked at 97.75/98.25, from 98.5/99 previously, according to sources.

The company said it now expects to generate adjusted EBITDA in the range of $4.8–4.95 billion, from $5.6–5.8 billion previously.

For the quarter ended March 31, Valeant reported a loss of $373.7 million, or $1.08 a share, compared with a profit of $97.7 million, or 29 cents a share in the year-ago period. The results also fell short of the S&P Global Market Intelligence consensus estimate for a loss of $329.77 million, or 94 cents a share.

Revenue climbed 9.3% to $2.37 billion, beating the consensus estimate of $2.33 billion.

Valeant said in its conference call that it expects to be in compliance with its debt covenants this year.

The B/B2 company ended the quarter with $1.2 billion in cash and long-term debt of $31.3 billion, of which it said it plans to pay down $1.7 billion by the end of December.

Valeant avoided defaulting on its debt agreements by filing the delayed report. As reported, the company received a notice of default from holders of its 5.5% senior unsecured notes due 2023 for failing to file its first-quarter 2016 results in a timely manner. The company in April also avoided default after it filed its annual report having delayed due to concerns over its accounting practices.

Note that Valeant is the second-largest issuer of performing loans in the S&P/LSTA Leveraged Loan Index, behind only Avago Technologies. It was the most widely held obligor in 2.0 CLOs in the third and fourth quarters of 2015, according to S&P Global Ratings. — Staff reports

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