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Things Remembered ratings cut by Moody’s after covenant violation

Moody’s downgraded retailer Things Remembered, citing a potential repeat violation of a financial-maintenance covenant as the company’s revenue declines.

Moody’s cut the company’s corporate family rating to Caa1, from B3, and senior secured credit facilities to B3, from B2. The outlook remains negative.

Things Remembered cured a violation of its financial-maintenance covenant in the first quarter of fiscal 2015 via a capital contribution. However, further sales and margin erosion is likely.

“Moody’s expects that revenue declines in the low-single-digit range, combined with step-downs to the net leverage test and minimal cushion on the interest coverage test, could result in another violation of the company’s financial maintenance covenants over the next 12-24 months,” according to a Moody’s statement on June 26.

“The downgrade reflects Things Remembered’s continued weak operating performance and Moody’s expectation that the company will be challenged to remain in compliance with its credit agreement without a meaningful improvement in operating performance or an amendment to the credit facility.”

Moody’s said that $135 million of the company’s term loan due 2018 remains outstanding.

In May 2012, KKR Capital Markets wrapped syndication of a $147 million senior secured loan due 2018 backing a $295 million buyout of Things Remembered by Madison Dearborn Partners. The transaction included $30 million of 6.5-year mezzanine debt and a $163 million of equity.

Things Remembered, based in Highland Heights, Ohio, sells personalized jewelry, drink ware, specialty gifts, home and entertaining products, office and recognition items, and baby and children memorabilia. – Abby Latour

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BDCs head to Washington to make case to modernize rules

In 2013, Rep. Mick Mulvaney (R-SC) toured the factory of Ajax Rolled Ring and Machine which manufactures steel rings used in construction equipment and power turbines.

The factory, which is located in York, S.C., now employs about 100 people. It has since been acquired by FOMAS Group.

But at the time of Mulvaney’s tour, Ajax was controlled by Prospect Capital, a business development company, or a BDC. Propsect Capital’s investment from April 2008 included a $22 million loan and $11.5 million of subordinated term debt.

Mulvaney said he had never heard of a BDC before that day at Ajax, nor realized how important BDCs were as an investment source in his district.

That has changed. Bringing laws for BDCs up-to-date has since become a key issue for Mulvaney, who is on the House Committee on Financial Services. He has proposed a draft bill to modernize the laws governing BDCs.

As a former small business owner himself, Mulvaney believes allowing BDCs to grow more easily, a key component of his proposed legislation, will provide much-needed financing to the mid-sized companies to which banks have cut lending since the credit crisis.

“BDCs fill a niche for companies too big to access their local banks, but too small to access public debt and equity markets. I am acutely aware of the importance of having capital for growth when you are running a company,” Mulvaney said.

Last week, the modernization of the laws governing BDCs was the subject of a hearing by the House Subcommittee on Capital Markets and Government Sponsored Enterprises. The hearing brought together titans of the BDC industry.

“The BDC industry is maturing, and growing in a meaningful way. They are beginning to realize they need to come together as a regulated industry and speak with a common voice,” said Brett Palmer, President of the Small Business Investor Alliance (SBIA).

“They are incredibly competitive, which is one of the challenges of getting them all in the same regulatory boat, rowing in the same direction.”

The timing of Prospect Capital’s purchase of Ajax Rolled Ring in April 2008 was not fortuitous. The company was heavily reliant on Caterpillar, which accounted for roughly 50% of revenue, and the global financial crisis took a heavy toll on Ajax in 2009 and 2010.

Still, Prospect Capital increased its investment in Ajax during those tough years. That investment allowed Ajax to build a machine shop, and thus deliver a more finished product to its customers. Last year, when Italy-based FOMAS unveiled an offer for Ajax in a bid to expand in the U.S. market, Ajax was a much stronger business with revenue diversified away from Caterpillar, according to Prospect Capital.

Rep. Mulvaney is hoping a bill could be ready at the end of July, and that it could be on the floor for debate by fall. The new draft of the bill addresses concerns raised over a prior proposal to reform BDC rules.

One size does not fit all
The SBIA estimated the number of active BDCs exceeds 80, and the size of the rapidly growing industry has surpassed $70 billion. “What’s a priority for one BDC is not necessarily a priority for another,” SBIA’s Palmer said.

Even with differences across the industry, possibly the most important potential change for BDCs is the asset coverage requirement. The change would effectively raise the leverage limit to a 2:1 debt-to-equity ratio, from the current 1:1 limit.

BDC managers argue that even with the change, leverage of BDCs would be conservative compared to other lenders, which can reach a level of 15:1, for banks, and even higher, to the low-20x, for hedge funds.

“It should allow BDCs to invest in lower-yielding, lower-risk assets that don’t currently fit their economic model,” Ares Capital Board Co-Chairman Michael Arougheti told the hearing. “In fact, the current asset coverage test actually forces BDCs to invest in riskier, higher-yielding securities in order to meet the dividend requirements of their shareholders.”

BDC managers say that BDCs are far more transparent than banks traditionally have been. After all, BDCs regularly publish their loans, as well as the loans’ interest rates and fair values, in quarterly disclosures with the Securities and Exchange Commission.

“We believe it would be good public policy to increase the lending capacity of BDCs, and promote the more heavily regulated, and more transparent, BDC model,” said Mike Gerber, an executive vice president at Franklin Square Capital Partners.

To garner support for the leverage change, the bill may require BDCs to give as much as a year’s notice for any increase, allowing shareholders to sell holdings before any change comes into effect, if they don’t approve.

However, the idea of “increasing leverage” has suffered a tarnished image with the public since the credit bubble and resulting global financial crisis. BDCs are popular with retail investors because of their high dividends.

Testimony of Professor J. Robert Brown, who was a Democratic witness at the June 16 hearing on BDC laws, could help repair this image problem, supporters of the change say. Brown said reducing the asset coverage for senior securities was an “appropriate” move toward giving BDCs more fundraising capacity.

“Such a change will potentially increase the risks associated with a BDC. Nonetheless, this is one area where adequate disclosure to investors appears to be a reasonable method of addressing the concern,” Brown’s published testimony said.

“In addition, the draft legislative proposal provides investors with an opportunity to exit the company before the new limits become applicable.”

Save paper
Another change under discussion is the definition of  “eligible portfolio company,” which dictates what type of companies BDCs can invest in.

BDCs were designed to furnish small developing and financially troubled businesses with capital. Existing rules dictate that BDCs invest at least 70% of total assets into “eligible portfolio companies,” leaving out many financial companies.

Some argue that the economy has changed since this BDC rule was put in place, moving away from traditional manufacturing companies.

“Changing the definition of eligible portfolio company to permit increased investment in financial firms may result in a reduction in the funds available to operating companies. It may also result in an increase in the cost of funds to operating companies,” Brown said in his published testimony.

Less controversial in a potential BDC modernization bill appears to be the desire to ease regulatory burdens for BDCs.

Main Street Capital CEO Vincent Foster drew attention to the SEC filing requirements born by even the smallest BDCs. He called for reform to the offering and registration rules, such as allowing BDCs to use “incorporation by reference” that would allow them to cite previous filings instead of repeating information in a new SEC filing. He said the change would not diminish investor protections.

By way of example, Foster held up a stack of papers at the hearing on the BDC bill, about four inches thick, that was needed by Main Street to issue $1.5 billion in stock. He then held up a stack of papers, less than one inch thick, needed by CIT, not a BDC, to allow for a $50 billion equity issuance.

“Do four more inches of paper protect better than a half an inch? Hundreds of pages represent wasted money and manpower,” Foster said.

“This discussion draft would fix this absurdity and make a host of clearly-needed reforms.” – Abby Latour

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Energy sector, Colt Defense focus of LCD’s Restructuring Watchlist

The beleaguered energy sector dominated activity this quarter on LCD’s Restructuring Watchlist, with Sabine Oil & Gas missing an interest payment on a bond and Hercules Offshore striking a deal with bondholders for a prepackaged bankruptcy.

Another high-profile bankruptcy this month was the Chapter 11 filing of gunmaker Colt Defense. Colt’s sponsor, Sciens Capital Management, agreed to act as a stalking-horse bidder in a proposed Section 363 asset sale. The bid comprises Sciens’ assumption of a $72.9 million term loan, a $35 million senior secured loan, and a $20 million DIP, and other liabilities.

The missed bond interest payment for Sabine Oil & Gas was due to holders of $578 million left outstanding of Forest Oil 7.25% notes due 2019, assumed through a merger of the two companies late last year.

The skipped payment comes after a host of other problems. Sabine Oil has already been determined to have committed a “failure to pay” event by the International Swaps and Derivatives Association, and will head to a credit-default-swap auction. The determination by ISDA is related to previously skipped interest on a $700 million second-lien term loan due 2018 (L+750, 1.25% LIBOR floor).

Meantime, Hercules Offshore on June 17 announced it entered a restructuring agreement with a steering group of bondholders over a Chapter 11 reorganization. The agreement was with holders of roughly 67% of its10.25% notes due 2019; the 8.75% notes due 2021; the 7.5% notes due 2021; and the 6.75% notes due 2022, which total $1.2 billion.

Among other developments for energy companies, Saratoga Resources filed for Chapter 11 for a second time, blaming challenges in field operations, the decline in oil and gas prices, and an unexpected arbitration award against the company. Thus, Saratoga Resources has been removed from the list. Another company previously on the Watchlist, American Eagle Energy, has been removed following a Chapter 11 filing in May.

Another energy company, American Energy-Woodford, could work itself off the Watchlist through a refinancing. On June 8, the company said 96% of holders of a $350 million issue of 9% notes due 2022, the company’s sole bond issue, have accepted an offer to swap into new PIK notes.

Also, eyes are on Walter Energy. The company opted to use a 30-day grace period under 9.875% notes due 2020 for an interest payment due on June 15.

Another energy company removed from the Watchlist was Connacher Oil and Gas. The Canadian oil sands company completed a restructuring in May under which bondholders received equity. The restructuring included an exchange of C$1 billion of debt for common shares, including interest. A first-lien term loan agreement from May 2014 was amended to allow for loans of $24.8 million to replace an existing revolver. A first-lien L+600 (1% floor) term loan, dating from May 2014, was left in place. Credit Suisse is administrative agent.

Away from the energy sector, troubles deepened for rare-earths miner Molycorp. The company skipped a $32.5 million interest payment owed to bondholders on a $650 million issue of first-lien notes. Restructuring negotiations are ongoing as the company uses a 30-day grace period to potentially make the payment.

In other news, Standard & Poor’s downgraded the Tunica-Biloxi Gaming Authority to D, from CCC, following a skipped interest payment on $150 million of 9% notes due 2015. Roughly $7 million was due to bondholders on May 15, and the notes were also cut to D, from CCC with a negative outlook. The company operates the Paragon Casino in Louisiana.

Constituents occasionally escape the Watchlist due to improving operational trends. Bonds backing J. C. Penney advanced in May after the retailer reported better-than-expected quarterly earnings and improved sales.

In another positive development, debt backing play and music franchise Gymboree advanced after the retailer reported steady first-quarter sales and earnings that beat forecasts. Similarly, debt backing Rue 21 gained in May after the teen-fashion retailer privately reported financial results, according to sources. – Abby Latour

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Here is the full Watchlist, which is updated weekly by LCD (Watchlist is compiled by Matthew Fuller):

Watchlist 2Q June 2015

 

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CORE Entertainment, owner of rights to American Idol, misses loan interest payment

CORE Entertainment, owner of rights to the American Idol television series, has missed an interest payment on a $160 million loan. The company now enters a 30-day grace period to make the payment.

As a result of the missed interest payment, Standard & Poor’s cut the rating on the 13.5% second-lien term loan due 2018 to C from CCC-, and placed the rating on CreditWatch negative.

Other ratings were also cut. Standard & Poor’s 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+.

The company’s cash totaled $81 million as of March 31, 2015, Standard & Poor’s said.

“We believe that CORE Entertainment has entered the grace period to preserve liquidity, given its cash flow deficits and ongoing investment needs,” Standard & Poor’s analyst Naveen Sarma said in a June 17 research note. “We plan to resolve the CreditWatch placement within 30 days. We could lower the ratings if we believe that CORE Entertainment will not make the interest payment or if the company defaults.”

The recovery rating on the second-lien loan is the lowest possible, at 6, indicating an expected negligible recovery (0-10%) in the case of a default. The recovery rating on the first-lien loan is 4, indicating an expected recovery of 30-50%, which is considered average on the Standard & Poor’s scale.

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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Sabine Oil skips interest payment on acquired Forest Oil bonds after loan default

Sabine Oil & Gas yesterday did not make the coupon payment due to holders of the $578 million left outstanding of Forest Oil 7.25% notes due 2019 that were assumed via the merger of the two companies late last year. Instead of making the approximately $21 million payment, the company will enter a typical 30-day grace period amid “continuing discussions with its creditors and their respective professionals,” according to a statement.

As previously announced, Sabine retained financial advisor Lazard and legal advisor Kirkland & Ellis to address strategic alternatives related to its capital structure. Cash on hand is approximately $277 million, which provides liquidity to fund operations, filings show.

The bonds changed hands yesterday at 21.5, which was fairly rangebound as compared to recent prints, trade data show. Other Sabine issues trade a bit lower, such as the 9.75% notes due 2017, which changed hands in blocks at 15.5, data show.

Sabine Oil has already been determined to have committed a “failure to pay” event by the International Swaps and Derivatives Association, and will head to a credit-default-swap auction. The determination by ISDA is related to previously skipped interest on a $700 million second-lien term loan due 2018 (L+750, 1.25% LIBOR floor).

Recall Sabine entered into a 30-day grace period after skipping a $15.313 million interest payment due to its second-lien lenders on April 21. Since that time, the issuer late last month inked a forbearance agreement to the end of June, barring any defaults under the forbearance agreement or if any other creditor accelerates payment (see “Sabine nets forbearance agreement to 2L TL as grace period ends,” LCD News, May 22, 2015).

In light of the missed interest payment, S&P in April cut Sabine’s corporate and debt ratings to D, triggering a default in the S&P LSTA Leveraged Loan Index. At the time, it was the third Index issuer to default this year after Walter Energy’s downgrade to D after skipping April 15 bond coupons and Caesars Entertainment Operating Company‘s bankruptcy in January, but since Sabine’s default, Patriot Coal last month became the fourth Index issuer to default following its Chapter 11 filing.

Wilmington Trust has replaced Bank of America Merrill Lynch as administrative agent on the second-lien loan, according to a June 1 filing.

Note the company in May also inked a forbearance agreement with lenders to its reserve-based revolver that also runs to June 30.

As of May 8, the company had a cash balance of approximately $276.9 million, which it said provides substantial liquidity to fund its current operations. – Staff Reports

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Colt Defense files Chapter 11; sponsor Sciens to purchase assets

Colt Defense today filed for Chapter 11 in Wilmington, Del., the company announced, saying that the filing would “allow for an accelerated sale of Colt’s business operations in the U.S. and Canada.”

Colt said its current sponsor, Sciens Capital Management, has agreed to act as a stalking horse bidder in the proposed asset sale. Details of the deal were not provided.

The company did say, however, that it would be soliciting competing bids and that it has appointed an independent committee of its board of managers to manage the process and evaluate bids.

Colt’s existing secured lenders have also agreed to provide a $20 million DIP facility to allow for continuation of operations during the Chapter 11 process, which the company said it expects to complete in 60-90 days.

As reported, since April Colt had been seeking consents from its noteholders for an uptier exchange offer or, alternatively, approvals for a proposed prepackaged reorganization plan implementing the exchange. Despite several extensions to the proposed exchange/prepackaged plan, however, the company fell far short of the participation threshold, and allowed the offer to expire on June 12.

O’Melveny & Myers LLP is the company’s legal counsel, and Perella Weinberg Partners is acting as financial advisor. Mackinac Partners is the company’s restructuring advisor. – Alan Zimmerman

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Judge approves $145M bankruptcy loan for Boomerang Tube, victim of oil-price downturn

The bankruptcy court overseeing the Chapter 11 proceedings of Boomerang Tube gave interim approval to the company’s proposed $145 million DIP facility.

The DIP comprises a $60 million term loan facility and an $85 million revolver. Court documents show that interest under the term portion would be at L+1,100, while interest under the revolver would be at L+450.

The interim approvals give the company access to $40 million of the term loan, consisting of $35 million of immediate borrowing capacity, and an additional $5 million thereafter upon certain circumstances. The company would have access to the entire revolver, subject, of course, to the facility’s borrowing base restrictions.

A final hearing on the DIP is scheduled for July 10, in Wilmington, Del. – Alan Zimmerman

 

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Family Christian bankruptcy sale hearing set for June 9

A bankruptcy hearing is scheduled for June 9 for a judge to approve the sale of non-profit book seller and missionary organization Family Christian Stores.

FC Special Funding, the proposed buyer, won an auction in May with a bid ranging from $39-41 million under which the company would continue to operate and assume some debt, court documents showed. FC Special Funding’s offer includes a $23 million credit bid from J.P. Morgan Chase.

Family Christian and affiliates filed for Chapter 11 on Feb. 11 in the U.S. Bankruptcy Court for the Western District of Michigan. The filing included a stalking-horse bid from FCS Acquisition that was eventually withdrawn.

The company, which is based in Grand Rapids, Mich., filed for bankruptcy with loans dating from 2012 that were put in place for general working capital and to facilitate an acquisition of the business.

The loans included a $40 million revolver under a November 2012 credit agreement, under which the debtor owes $23 million. J.P. Morgan Chase Bank is the agent.

The company also owes $34 million under a $38 million term loan agreement, also from November 2012. Credit Suisse is agent. The lenders are Credit Suisse Loan Funding, Medley Capital, Congruent Credit Opportunities Fund II, and Main Street Mezzanine Fund.

The debtor also owes $40 million in trade debt to suppliers and vendors.

The company sells Christian books, music, DVDs, church supplies, and other Christian-themed merchandise through 266 stores, mail-order catalogs, and online.

Operations have been weakening since 2008. Sales totaled $305 million in fiscal 2008 and had dropped to $230 million by fiscal 2014. Sales in fiscal 2015 are forecast at $216 million. The company blamed its financial problems on the recession that began in 2008, and declining industry trends that have generally hurt music and book sales.

Since the company operates as a non-profit, any available profits, as well as collected donations, fund charitable causes and missionary work, including Bible donations in Latin America and Africa, care for orphans and widows, international adoptions, rescue of women enslaved in sex trafficking, and mission trips.

The company was established in 1931 with Zondervan retail stores, later changing its name to Family Bookstores, and finally to Family Christian Stores in the 1990s after changing hands.

The operating company is owned by a Georgia-based non-profit, Family Christian Resource Centers. Because of the financial difficulties, the debtor has only paid around $300,000 to the parent company since 2012 for its mission causes, excluding third-party donations collected by retail stores.

Chicago-Based middle-market private equity firm Madison Dearborn Partners bought privately held Family Christian Stores in 1999. Before the sale, the company had been considering financing alternatives after shelving plans to list shares in an IPO in October 1998 due to market volatility. The company was acquired by the endowment arm of Minneapolis-based Christian Investors Financial in November 2012, S&P Capital IQ showed.

Main Street Capital, a BDC that trades on the NYSE under the ticker MAIN, had a non-accrual loan to FC Operating in its portfolio in the recent quarter. That investment comprised $5.4 million of secured debt due November 2017 (L+1,075, 1.25% LIBOR floor). The fair value was marked at $3.2 million as of March 31, 2015, versus $4.1 million at fair value as of Dec. 31, when it wasn’t in bankruptcy or on non-accrual status.

Medley Capital’s investment portfolio showed a $10.4 million (L+1,075, 1.25% LIBOR floor) first-lien term loan due 2017 to FC Operating on non-accrual status as of March 31. The loan was marked at $6.3 million at fair value. Medley Capital is a BDC that trades on the NYSE as MCC. – Abby Latour

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Speculative-grade bond defaults in May climb to highest since 2009, S&P report says

The eight speculative-grade corporate bond defaults in May marks the highest one-month count since nine defaults in October 2009, as companies remain challenged by volatility in the commodities markets, according to S&P Global Fixed Income Research (S&P GFIR).

Standard & Poor’s defines speculative-grade debt as having ratings of BB+ and lower.

The oil-and-gas sector leads with downgrades and defaults, but the number of downgrades across all sectors remains elevated. Indeed, downgrades during the month outnumbered upgrades by 35 to 12, according to S&P GFIR.

However, Diane Vazza, head of S&P GFIR tempered the data with the following statement: “Despite the increasingly negative rating actions for speculative-grade U.S. companies, we continue to see positive investor demand in the market; year-to-date issuance is up from last year, credit spreads narrowed slightly during the month, and total returns were modestly positive for the month.”

As for the eight defaults during the month, all were public. Magnetation and Patriot Coal filed for bankruptcy; Colt Defense and Tunica-Biloxi Gaming Authority/Paragon Casino skipped bond coupons; Warren Resources and Midstates Petroleum inked sub-par bond exchanges; and SandRidge Energy and Halcon Resources completed bond-for-equity exchanges, also below par.

With that, the U.S. trailing-12-month speculative-grade corporate default rate is estimated to have increased to 2.0% in May, from 1.8% in April, according to S&P GFIR. The current observation represents the highest level in 17 months, or since the rate was at 2.2% in December 2013.

The S&P GFIR forecast for the U.S. speculative-grade default rate is for a modest increase, to 2.5% by December 2015 and 2.8% by March 2016.

Today’s report, titled “Defaults Rise As Downgrades Remained Elevated In May,” is available to subscribers of premium S&P GFIR content at the S&P Global Credit Portal.

For more information or data inquiries, please call S&P Client Services at (877) 772-5436. – Staff reports

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ELO Touch Solutions, backed by Gores, uses equity cure after challenging quarters

ELO Touch Solutions, which is backed by private equity firm The Gores Group, used an equity cure in the recent reporting period.

As a result, Standard & Poor’s revised the company’s outlook to negative, from stable, on May 28. The ratings agency affirmed the company’s CCC+ corporate rating at the same time.

“The outlook revision reflects Elo’s use of an equity cure in the second fiscal quarter of 2015, resulting from challenged performance during the first half of the year, and our view that the company will likely require additional support in the future to maintain covenant compliance,” Standard & Poor’s analyst Christian Frank said in a research note on May 28.

Standard & Poor’s also affirmed the B- rating on the company’s $175 million first-lien term loan due 2018 and its $15 million revolving credit facility due 2017. The loan has a recovery rating of 2, indicating expectations for recovery in the higher half of a 70-90% range on the debt in case of a default.

Standard & Poor’s also affirmed the CCC- issue-level rating, with a recovery rating of 6, on the company’s $85 million second-lien term loan due 2018, of which $37.5 million is outstanding. The 6 rating indicates an expected recovery of zero to 10% if the loan defaults.

Revenue is expected to decline in the mid-single digits in fiscal 2015, after growing by that degree in the fiscal year ended Sept. 31, 2014, Standard & Poor’s said in a research note.

Investment in new products is expected to weigh on margins in the 2015 fiscal year, then rebound. A stronger U.S. dollar has also hurt revenue and earnings this year, Standard & Poor’s said.

New products will probably help leverage, which is expected “increase modestly” this year from the low-5x area as of March 27, 2015. That level is down from an 8x peak as of June 28, 2013, Standard & Poor’s said.

“We believe that ELO’s new point-of-sale, digital signage, and touch screen component products could result in revenue growth over the next few quarters,” said S&P analyst Frank. “In the longer term, we believe that the company’s financial sponsor ownership will likely preclude sustained leverage reduction.”

Investors received allocations of a $260 million first- and second-lien financing backing the Gores Group’s $380 million purchase of ELO Touch Solutions in June 2012. Arrangers were Credit Suisse and Goldman Sachs.

The deal was structured as a $175 million, six-year first-lien term loan, which was issued at 96 and priced at L+650 (1.5% LIBOR floor), and a $85 million second-lien term loan, which was also issued at 96, with pricing of L+1,050 (1.5% floor). At issuance, corporate ratings were B/B2.

Moody’s has since downgraded the company to Caa1.

ELO Touch Solutions, based in Milpitas, Calif., supplies touch screens, touch monitors, and all-in-one touch computers. – Abby Latour

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