Loan default rates climb in August amid weakness in Energy sector

After a two-month absence, default activity resumed in August, when two energy names – Samson Resources and Alpha Natural Resources – defaulted on $1.6 billion of S&P/LSTA Index loans. As a result, the lagging-12-month default rate climbed to a five-month high of 1.30% by amount, from July’s 33-month low of 1.11%, and to 0.78% by number of issuers, from a 7.5-year low of 0.57%.

Loan index defaults Aug 2015


U.S. speculative-grade corporate default rate hits two-year high

The U.S. trailing-12-month speculative-grade corporate default rate increased to 2.4% in August, reflecting seven defaults during the month, according to estimates by Standard & Poor’s global fixed income research. The latest reading represents the highest level for the default rate in the past two years.

Alpha Natural Resources Inc., ASG Consolidated LLC, SandRidge Energy Inc., Samson Resources Corp., Wilton Holdings Inc.,SAExploration Holdings Inc., and Halcon Resources Corp. each defaulted in August.

The rating agency expects the U.S. trailing-12-month speculative-grade corporate default rate to rise to 2.9% by June 30, 2016.

At the same time, the Standard & Poor’s U.S. distress ratio rose to 15.5% in August, its highest level in more than four years, as plunging oil prices caused spreads of Oil & Gas issues to widen considerably (see “Oil & Gas issues push S&P U.S. distress ratio to 4-year high,” LCD News, Aug. 27, 2015.)

According to S&P, the U.S. investment-grade spread expanded to 211 bps as of Aug. 31, from 196 bps as of July 31, while the speculative-grade spread widened considerably to 643 bps, from 607 bps. – Rachelle Kakouris


Oil & Gas companies account for more than a quarter of 2015 defaults

The global corporate default tally climbed to 70 issuers after two U.S.-based exploration-and-productions companies triggered a default in the past week. Oil & Gas companies now account for more than a quarter of defaults so far this year, according to a report published by Standard & Poor’s on Friday.

SandRidge Energy entered into an agreement to repurchase a portion of its senior unsecured notes at a significant discount to par, prompting S&P to lower its corporate credit rating on Aug. 14 to D, from CCC+, on what the agency considers to be a distressed transaction and “tantamount to a default”.

Samson Resources failed to make the interest payments due on its $2.25 billion of 9.75% unsecured 2020 notes due Aug. 15. Standard & Poor’s subsequently lowered Samson’s corporate credit rating to D, from CCC-.

Of the 70 defaulting entities, 40 are based in the U.S., 14 in emerging markets, 12 in Europe, and 4 in the other developed nations. By default type, 22 defaulted due to missed interest or principal payments, 19 because of distressed exchanges, 14 reflected bankruptcy filings, seven were due to regulatory intervention, six were confidential defaults, one resulted from a judicial reorganization, and one came after the completion of a de facto debt-for-equity swap.

Standard & Poor’s Global Fixed Income Research estimates that the U.S. corporate trailing-12-month speculative-grade default rate will rise to 2.8% by March 2016, from 1.8% in March 2015 and 1.6% in March 2014. – Staff reports


American Apparel raises going concern warning as losses deepen

Embattled clothing retailer American Apparel issued a going concern warning on Monday, stating once again that it may not have enough liquidity to continue its operations for the next 12 months amid deepening losses and negative cash flows.

American Apparel said in an SEC filing after yesterday’s close that it had reached an agreement with a group of lenders, led by Standard General, to replace its $50 million credit facility with a $90 million asset-based revolver, maturing April 4, 2018. Wilmington Trust replaces Capital One as the administrative agent, the filing said.

Despite the cash infusion, American Apparel further warned that if it is unsuccessful in addressing its near-term liquidity needs or in adequately restructuring its obligations outside of court, it “may need to seek protection from creditors in a proceeding under Title 11” of the US bankruptcy code.

Note the company has a $13 million interest payment on its 15% first-lien 2020 bonds in October.

Shares in the name fell 4% to 14 cents as at mid-morning on Tuesday, having lost more than 85% this year.

As reported, American Apparel said it had been in ongoing discussions with Capital One regarding a potential waiver in an effort to avoid a potential default, and as a result of these discussions, was unable to file its second quarter 2015 10-Q filing before the regulatory deadline.

According to yesterday’s filing, the company was not in compliance with the minimum fixed charge coverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2015 through June 30, 2015 covenant reference period, its coverage ratio was 0.07 to 1.00 as compared with the covenant minimum of 0.33 to 1.00, and its adjusted EBITDA was $4,110 compared with the covenant minimum of $7,350. The covenant violations were waived under the Wilmington Trust Credit Facility.

The retailer on Monday confirmed its second-quarter results, released on a preliminary basis last week. As reported, second-quarter net losses jumped 20% to $19.4 million, or $0.11 per share, from a loss of $16.2 million, or $0.09 per share in the year-ago period. This is the company’s 10th consecutive quarterly loss.

Revenue fell approximately 17% from the year-ago period, to $134 million.

Adjusted EBITDA for the three months ended June 30, 2015 was $4.1 million, versus $15.9 million for the same period in 2014. As of Aug. 11, 2015, American Apparel had $11,207 in cash.

As reported, the company said it has begun discussions to analyze “potential strategic alternatives,” which may include refinancing or new capital raising transactions, amendments to or restructuring of its existing debt, or other restructuring and recapitalization transactions.

American Apparel is rated CCC- by Standard & Poor’s, with negative outlook. Its 13% senior secured notes due 2020 are rated CC, with a recovery rating of 5. Moody’s last week downgraded the company to Caa3 from Caa2, and placed the company under review for downgrade. – Rachelle Kakouris


Loan defaults set to hit 6-month high with Samson Resources Ch 11 filing next month

The default rate of the S&P/LSTA Leveraged Loan Index will increase to 1.27% by principal amount next month, from 1.17%, when Samson Resources via Samson Investment Company files for bankruptcy, tripping a default on its second-lien secured loan. The default rate by issuer count will tick up to 0.77%, from 0.67%, according to LCD.

The default rate would be at a six-month peak, or the highest level since 3.79% as of March 31, although that was including Energy Future Holdings, which is no longer counted in the default rate due to the rolling-12-month basis. Excluding EFH, the default rate post-Samson would hit its highest level since February 2014 when it was 1.86%, according to LCD.

Privately held, KKR-controlled Samson on Friday announced publicly that it has entered into a restructuring support agreement with certain lenders holding 45.5% of the company’s second-lien debt, and with its sponsor on a proposed balance sheet restructuring that “would significantly reduce the company’s indebtedness and result in an investment of at least $450 million of new capital.”

Under the terms of the RSA, second-lien lenders, including Silver Point, Cerberus and Anschutz, have agreed to invest at least $450 million of new capital to provide liquidity to the balance sheet post reorganization and permanently pay down existing first-lien debt, the company said.

As a result, the company said it would not make the interest payment due today under its sole outstanding corporate issue, the $2.25 billion of 9.75% unsecured notes due 2020, but instead would use the 30-day grace period triggered by its non-payment “to build broader support for the restructuring and continue efforts to document and ultimately implement the reorganization transaction as part of a Chapter 11 filing.” The debt is worthless, trading below 1 cent on the dollar, down from around 30 in March, and a par context a year ago before the bear market mauling in oil.

The Samson loan default would not be particularly large, as the second-lien term loan was originally $1 billion in the Index. However, it’s notable as the second largest loan default this year, or since Caesars Entertainment kicked off the New Year in mid-January with the sixth largest default on record, at $5.36 billion across four tranches in the Index, according to LCD.

Assuming no other defaults leading up to Samson next month, it would become sixth loan-issuer default in the Index this year, following rival coal credits Alpha Natural Resources earlier this month, Patriot Coal in May, and Walter Energy in April, as well as exploration-and-production company Sabine Oil & Gas in April. Meanwhile, the eight ex-Index defaults this year are Altegrity, Allen Systems, American Eagle Energy, Boomerang Tube, Chassix, EveryWare, Great Atlantic & Pacific Tea, and Quicksilver Resources.

The shadow default rate for the Index is currently at 0.72%, down from 0.82% last month, but nearly triple the 0.29% rate in April. There is $5.51 billion of Index outstandings on the shadow list, and that includes Samson since its hiring of Kirkland & Ellis and Blackstone Group in February. This rate includes loans that are paying default interest but which are still performing, loan issuers that have bonds in default, and issuers that have hired bankruptcy counsel or that have secured a forbearance agreement.

There are five loan issuers on the shadow list that are publicly known. Beyond Samson, it’s Gymboree, Dex Media, Millennium Health, and Vantage Drilling, all of which are consulting advisors. – Matt Fuller

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Altegrity nets confirmation of reorganization plan

The bankruptcy court overseeing the Chapter 11 proceedings of Altegrity on Aug. 14 confirmed the company’s reorganization plan, according to a court order filed in the case.

As reported, the Wilmington, Del., bankruptcy court approved the adequacy of the company’s disclosure statement on May 15, but the confirmation hearing, initially set for July 1, was delayed several times, finally until Aug. 14, for undisclosed reasons.

Under the company’s plan, first-lien debt of $1.119 billion, comprised of a term loan with an allowed claim of $294.2 million in principal (about $273.6 million of term debt and $21 million in letters of credit issued under a related revolver) and first-lien notes in the principal amount of $825 million, plus accrued but unpaid interest and reimbursement of certain professional and other fees, is to be reinstated.

Holders of second-lien notes, meanwhile, are to receive 96.91% of the company’s reorganized equity, holders of third-lien notes are to receive 1.98% of the equity, and holders of the company’s unsecured notes are to receive 1.11% of the equity.

The company has estimated its reorganized equity value at $153-362 million, with a midpoint of $256 million, which is based on an estimated total enterprise value of $1.235-1.444 billion, with a midpoint of $1.338 billion, less net debt of $1.082 billion.

Thus, the midpoint of the company’s valuation translates into a recovery of 47.8% for second-lien notes (based on about $519.3 million of allowed claims), a recovery of 7.6% for third-lien notes (based on roughly $66.3 million of allowed claims), and a recovery of 5.4% for unsecured noteholders (based on about $53 million of allowed claims).

The company has also set aside $1.25 million in cash for general unsecured claims, meaning that general unsecured creditors would recover 11.9%, based on $10.5 million of allowed claims.

As reported, the company filed for Chapter 11 on Feb. 9, with a restructuring-support agreement that the company said had the backing of holders of more than 75% of the company’s first-lien secured debt, and holders of about 95% of the company’s second- and third-lien secured debt. The company subsequently tweaked the proposed recoveries under the RSA slightly, however, in order to win the backing of the unsecured creditors’ committee appointed in the case and smooth the path to confirmation (see “Altegrity tweaks plan recoveries to gain backing of creditor panel,” May 13, 2015) – Alan Zimmerman


Main Street Capital books $4.7M loss in 2Q for Family Christian loan

Main Street Capital booked a $4.7 million loss for an investment in retailer Family Christian in the recent quarter, resulting in a decline in the share of its portfolio companies on non-accrual status.

Main Street Capital realized the loss for the investment in the quarter ended June 30, a 10-Q released today showed. Specialty Christian retailer Family Christian, based in Grand Rapids, Mich., filed for bankruptcy in February.

Main Street Capital’s investment in FC Operating as of March 31 comprised $5.4 million of secured debt due November 2017 (L+1,075, 1.25% LIBOR floor) and was listed as non-accrual at that time.

Due to the exit of the private loan investment in Family Christian, Main Street Capital has only four investments on non-accrual status. These investments comprised 0.3% of the fair value of Main Street’s investment portfolio, and 3.1% on a cost basis. This compares to 1.2% of the investment portfolio’s fair value on March 31, and 3.9% on a cost basis.

The four investments currently on non-accrual status are the same as in the previous quarter: Quality Lease and Rental HoldingsCalloway LaboratoriesModern VideoFilm, and Clarius BIGS.

Quality Lease and Rental Holdings, based in El Campo, Texas, provides oilfield rental equipment, products, and services. The company operates as a subsidiary of oilfield housing company Rocaceia, which filed for Chapter 11 in October with debt of $10-50 million.

Main Street Capital’s investment in Quality Lease and Rental Holdings included $30.8 million of 12% secured debt whose fair value was booked at under $1 million as of June 30.

Main Street Capital’s investment in Calloway Laboratories includes a $7.3 million 12% PIK first-lien term loan due 2015, marked at $2.8 million at fair value as of June 30. Calloway Laboratories, based in Woburn, Mass., provides clinical toxicology laboratory services, specializing in proprietary drug testing protocols.

The investment in Modern VideoFilm included a $6.3 million first-lien term loan due 2017 (L+500, with a 1.5% floor, 8.5% PIK), was marked below $1 million as of June 30. The Burbank, Calif.-based company provides post-production services to the film and television industry.

A loan for Clarius BIGS was also on non-accrual, comprised of $4.4 million of 12% secured debt, marked at $1.7 million as of June 30. The company provides prints and advertising film financing. It is a sister company of Clarius Entertainment, which is a Los Angeles-based feature film acquisition, marketing, and distribution company.

Houston-based Main Street provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. The business-development company trades on the NYSE under the ticker MAIN. – Abby Latour

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RAAM Global Energy extends deadline for bond exchange again

Struggling oil and gas exploration and production company RAAM Global Energy has extended an exchange offer for its 12.5% secured notes due 2015 by an additional week.

The exchange offer, which is for new 12.5% notes due 2019 and RAAM common stock, was due to expire on July 16. The new deadline is July 23.

So far, roughly $226.5 million in principal of the 12.5% secured notes due 2015, or 95.2% of outstanding notes, has been tendered, a statement said. The company has previously extended the deadline several times.

In April, RAAM Global Energy said it would enter into discussions with senior term loan lenders and bondholders after failing to pay a $14.75 million coupon on the bonds due 2015.

Standard & Poor’s cut RAAM Global Energy’s corporate credit rating to D, from CCC-, and the issue-level rating on the company’s senior secured debt to D, from CCC-, after the missed bond interest payment. A month later, the ratings were withdrawn at the company’s request.

RAAM Global Energy sold $150 million of 12.5% secured notes due 2015 in September 2010 through bookrunners Global Hunter Securities and Knight Libertas. Proceeds funded general corporate purposes. The bond issue was reopened by $50 million in July 2011 and by another $50 million in April 2013.

The company also owes debt under an $85 million first-lien term loan due 2016. Wilmington Trust is agent.

RAAM Global Energy Company’s production facilities are in the Gulf of Mexico, offshore Louisiana and onshore Louisiana, Texas, Oklahoma, and California. – Abby Latour

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CORE Entertainment downgraded again; grace period on loan lapses

Moody’s downgraded ratings on CORE Entertainment, citing deteriorating earnings for its U.S. Idol franchise that Fox will not renew after the 2016 season, and the expiration of a 30-day grace period to make a missed loan interest payment.

“The negative outlook reflects the very high leverage, the decline of its Idol franchise, the missed interest payment on the 2nd-lien term loan, and negative free cash flow that elevates restructuring risk,” Moody’s said in a July 15 research note.

Leverage for the company, which owns and develops entertainment content, exceeded 10x as of the first quarter of 2015.

Standard & Poor’s cut CORE Entertainment ratings last month after the company missed the interest payment on a $160 million second-lien loan due 2018.

Moody’s cut CORE Entertainment’s corporate family rating yesterday to Ca, from Caa3, and a $200 million senior secured first-lien term loan due 2017 to Caa2, from Caa1. Moody’s affirmed a Ca rating on the $160 million second-lien term loan due 2018.

“Following the 2016 season of Idol, the company will be reliant on its So You Think You Can Dance (Dance), International Idol format revenue, and its Sharp Entertainment division for earnings which will increase the unsustainability of its capital structure with debt that starts to mature in June 2017,” Moody’s said.

“The cash balance has not been used to acquire EBITDA producing assets to offset the EBITDA lost following the Elvis Presley Enterprises sale and development of new programming content has been slower than expected.”

In June, Standard & Poor’s cut the rating on the 13.5% second-lien term loan due 2018 to C, from CCC-, lowered the company’s corporate rating to CCC-, from CCC+, and the rating on a $200 million senior first-lien term loan due 2017 to CCC-, from CCC+.

Investors in the company are Apollo Global Management and Crestview Partners.

CORE Entertainment, and its operating subsidiary Core Media Group, owns stakes in the American Idol television franchise and the So You Think You Can Dance television franchise.

The loans stem from Apollo’s buyout of the company, formerly known as CKx Entertainment, in 2012. – Abby Latour

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JW Resources, backed by HIG Capital affiliate, files Chapter 11

Kentucky coal producer JW Resources, backed by an affiliate of HIG Capital, filed for bankruptcy intending to sell assets through a 363 sale.

The filing was in the U.S. Bankruptcy Court for the Eastern District of Kentucky on June 30.

The filing listed debt of $50-100 million. The secured lenders to the company are GB Credit Partners and Bayside JW Resources.

In March 2014, middle market lender GB Credit Partners, the investment management operation of Gordon Brothers Group, provided a $15 million term loan and revolver to JW Resources. Proceeds funded working capital.

The company blamed the bankruptcy on a 26% drop in coal prices through April 2015, higher mining and processing costs due to government regulations, and declining demand for coal. The company failed to find more funding from secured lenders, equityholders, or third parties.

JW Resources hired Energy Ventures Analysis (EVA) as investment bankers to help carry out the sale through an open auction process.

Bayside Capital is the majority owner of JW Resources, with an equity holding of 74.4%, court filings showed. Investment firm Bayside Capital is an affiliate of HIG Capital and provides debt and equity investments to middle-market companies.

JW Resources produces mines coal with mineral reserves in the Central Appalachian regions of Kentucky. JW Resources acquired its assets and business operations from Xinergy Corp. in February 2013. – Abby Latour

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