Distressed debt: Weight Watchers B-2 term debt extends losses; co. eyes B-1 2016 maturity

Weight Watchers International covenant-lite B-2 term debt due 2020 (L+325, 0.75% LIBOR floor) is extending losses this morning, recently marked at 53.5/55.5, after coming under pressure late yesterday on the company’s fourth-quarter results, which missed Street expectations and showed declines in membership. By comparison, the paper was wrapped around 59 late yesterday following the news and was pegged in a 63/64 context ahead of the results, according to sources.

The most recent drop pushes the paper, issued in April 2013 at 98.5, to fresh lows, according to Markit.

The less-liquid B-1 term loan due 2016 (L+300) has held up better, with dealers making markets in the paper this morning at 94/96 and 95/97, which is down 1-2 points from prior to the news. Note that on yesterday’s conference call, management said it is targeting a cash balance of at least $350 million by the end of the year, which would provide it with “ample liquidity” to address the April 2016 maturity of the B-1 tranche, according to a transcript of the call provided by Bloomberg. For reference, there was about $296 million outstanding under the B-1 tranche as of Sept. 30, SEC filings show.

The company’s shares, which trade on the New York Stock Exchange under the ticker WTW, tumbled about 31% this morning on the news, to $12.12.

As reported, the company reported that fourth-quarter revenue declined 10.4% from the prior year period, to $327.8 million, and fell below the S&P Capital IQ consensus estimate of $332.7 million, as membership declined 15% in the past quarter, to 2.51 million.

Meanwhile, fourth-quarter EBITDAS (earnings before interest, taxes, depreciation, amortization and stock-based compensation) declined to $29.9 million, from $92.9 million in the year-ago period.

LTM adjusted EBITDA came in at $338.3 million, for net leverage of about 6.1x, given the $2.358 billion of debt outstanding, net of $301 million of cash. Leverage is up a full turn, from 5.1x, at the end of the third quarter, SEC filings show.

“While we still believe in our underlying strategies, I am disappointed that we are not yet where we hoped to be and our turnaround will take longer than we had anticipated,” CEO Jim Chambers warned.

Chambers also said that the company is taking more-aggressive steps with cost structure through a $100 million cost-savings initiative.

The company reported a fourth-quarter loss of $16.1 million, or $0.28 per share, versus a profit of $30.8 million, or $0.24 per share in the year-ago period.

For 2015, Weight Watchers expects earnings per share of $0.40-0.70, versus the S&P Capital IQ consensus estimate of $1.43 per share.

Weight Watchers is rated B/B1, while its term debt is rated B+/B1, with a 2 recovery rating.

Weight Watchers in April 2013 wrapped a comprehensive refinancing of its bank debt via J.P. Morgan, Bank of America Merrill Lynch, HSBC, Scotia, and U.S. Bank. J.P. Morgan is administrative agent. The transaction was comprised of a $2.1 billion, seven-year B-2 term loan; a $300 million, three-year B-1 term loan; and a $200 million, five-year revolver. The term loans are covenant-lite. – Kerry Kantin/Rachelle Kakouris

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Joe’s Jeans Defaults on $60M Leveraged Loan; Interest Rises to 14%

Joe’s Jeans defaulted on a $60 million term loan and will begin paying default interest of 14%, instead of 12%.

Garrison Loan Agency Service is the agent. The default, on Nov. 6, stems from the company failing to meet the minimum-EBITDA covenant for the 12 months ended Sept. 30.

As a result of the term loan default, the company defaulted on a revolving credit agreement and a factoring facility with CIT Commercial Services. The company owes $33.9 million under the RC, and has availability of $13.7 million, including the factoring facility, as of Sept. 30.

Management is in talks with Garrison and CIT over amendments and default waivers. Without a waiver, lenders could accelerate repayment, possibly triggering a bankruptcy, an SEC filing today said.

In the nine months ended Aug. 31, the company generated net income of $276 million, versus a net loss of $287 million in the same period a year earlier.

In September 2013, CIT Capital Markets and Garrison Investment Group provided $110 million in debt financing to Joe’s Jeans to back the $97.6 million acquisition of Hudson Clothing from Fireman Capital Partners, Webster Capital, and management.

The financing includes a $60 million, five-year term loan and an up to $50 million, five-year borrowing-based revolver. At syndication, the bulk of the RC was priced at L+250, while a $1 million RC-1 sliver was priced at L+350. The RC is subject to a 50 bps call in year two if Joe’s Jeans terminates the RC commitment.

At syndication the five-year term loan was priced at L+1,075 and callable at 103, 102, and 101, according to the filing. The loan is subject to fixed-charge and leverage ratios, and an EBITDA minimum.

In addition to the acquisition, proceeds funded fees and expenses, working capital and general corporate purposes. Joe’s Jeans also issued $32.4 million of convertible notes to the sellers as part of the deal.

Los Angeles-based Joe’s Jeans designs, sources and distributes branded apparel products to over 1,200 retail locations in the U.S. and abroad. The company’s shares trade on the Nasdaq under the ticker JOEZ. – Abby Latour

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Spain’s Codere remains in negotiations for debt restructuring

codere logoIn a regulatory offering overnight with the Spanish stock market regulator, Codere reiterated that it remains in negotiations with bondholders over the restructuring of its debt.

To date, bondholders have presented five proposals, while the company has presented four. The firm believes its business is viable long-term, as it continues to generate positive cash flows. However, a financial restructuring of its debt is necessary for the company to be financially sustainable going forward.

If no agreement is reached, however, Codere will have to file for insolvency under Spanish bankruptcy law.

The next milestone date for the group is the beginning of February, when the 30-day extension on its SFA expires (Codere obtained this extension on Jan. 8).

Following a 30-day grace period, the Spanish gaming group missed its €31.4 million coupon payment earlier this month on its 8.25% notes due 2015, which was originally due on Dec. 15, 2013.

As of Sept. 30, 2013, the group held €1.2 billion of debt against cash of roughly €95.4 million. As of Dec. 31, this cash level totalled roughly €30 million, Codere said.

Based in Spain, Codere has major operations in Argentina, deriving a significant amount of annual revenue from its gaming and bingo halls there. The company is rated SD/Caa3. – Sohko Fujimoto

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LightSquared lawyer stonewalled by Sound Point witness on day four

lightsquared logoThe LightSquared trial to determine whether Charles Ergen fraudulently acquired about $1 billion of LightSquared’s senior debt resumed in Manhattan bankruptcy court this morning, for a fourth day, with testimony from Sound Point Capital Management head Stephen Ketchum, who carried out the trades that gave Ergen’s fund a blocking position in the case.

Philip Falcone, the head of Harbinger Capital Partners, LightSquared’s largest equity holder, will take the witness stand this afternoon.

LightSquared lawyer Michael Hirschfeld, a partner at Milbank, spent hours attempting to establish that Ketchum and Dish Treasurer Jason Kiser – who testified last week (see, “LightSquared trial continues on day two with Dish treasurer,” LCD News, Jan. 10, 2014) – set out to build a blocking position in LightSquared’s senior debt in order to gain control in the company’s bankruptcy proceedings. In the process, Ketchum and Kiser then purposely delayed the closing of many of those trades, Hirschfeld claimed. But Ketchum was a difficult witness for the plaintiffs.

Time and time again, Ketchum answered most of Hirschfeld’s questions with “I don’t recall,” or a simple “no.” At one point, Judge Shelley Chapman paused the proceedings to remind Ketchum, “it’s your obligation to tell the truth here.”

Ketchum has known Kiser for about 20 years. Ketchum recently helped Kiser make trades in the debt of LodgeNet during its Chapter 11 proceedings, on behalf of EchoStar. The LightSquared trades mark the first time Ketchum made trades for Ergen personally, however.

Kiser testified last week that Ketchum established an entity known as SP Special Opportunities to carry out the debt trades on Ergen’s behalf. SPSO would allow Ergen to make the trades without disclosing his identity to the market. When asked this morning whether his firm formed SPSO, Ketchum simply replied: “I don’t recall.”

At one point in this morning’s proceedings, Hirschfeld mentioned an e-mail Ketchum wrote discussing the possibility of selling $5 million in face value of LightSquared debt at 88.5 cents on the dollar in order to test the market. From about May 2012 to May 2013, Ergen bought LightSquared debt, via SPSO, at prices ranging from about 48 to 96 cents on the dollar. Ketchum allegedly wanted to test the market with a sale to “send a signal to the market that we are not going to ride this thing up to the moon,” Hirschfeld said.

Discussing SPSO trades that remained open for weeks or months, Hirschfeld read from e-mails between Ketchum and Jefferies high yield salesman Stephen Sander. LightSquared alleges Ergen purposely left those trades open to thwart alternate funding the company was trying to raise in its reorganization. According to the e-mail transcripts, Sander at one point asked Ketchum if he needed to come to the office in person to discuss closing the trades “mano a mano.”

“Were you afraid this would come to fisticuffs?” Hirschfeld asked Ketchum.

“My Spanish isn’t very good, but I wasn’t worried,” Ketchum said.

LightSquared lawyer Matthew Barr told Judge Chapman this morning the company would present its engagement letter for exit financing in court on Thursday. In late December, LightSquared announced JP Morgan and Credit Suisse were arranging new exit financing that would serve as the cornerstone of the company’s reorganization plan, which calls for a new senior term loan of up to $2.5 billion; a $250 million senior secured term loan from JP Morgan; at least $1.25 billion in new equity contributions from Fortress Investment Group, Melody Capital, and Harbinger Capital; and the preservation of the multi-billion dollar litigation claims against Dish and Ergen being hashed out in this trial.

Harbinger Group, Falcone’s holding company, launched a $200 million offering of eight-year senior notes this morning via bookrunners Credit Suisse, Deutsche Bank, and Jefferies. – John Bringardner


YRC term debt settles lower in trading as default prospects increase

YRC WorldwideYRC Worldwide bank debt settled at lower levels today as the possibility of a loan-agreement default increased after the company’s recapitalization efforts unraveled.

Shares of YRC ‘s common stock were off sharply after the company failed to garner rank-and-file support for a new contract with the International Brotherhood of Teamsters yesterday. The union agreement was needed for the company to complete an equity sale and refinance its loan. The proposed recapitalization plan would have allowed YRC to address the upcoming maturity in its 6% convertible notes due Feb. 15, 2014. If those notes aren’t refinanced or extended by Feb. 1, the existing loan will slide into default.

Markets in YRC’s term loan due 2015 (L+700, 3.5% LIBOR floor) emerged at 93/94 today, sources said. Bids for the loan dropped to near 90 late yesterday, from 94/95 at midday, and compared to 97.5/99 early yesterday, when the results of the union vote were still in question.

Late yesterday, Credit Suisse cancelled a bank meeting as a result of the failed union vote. The meeting, which was scheduled for today, was to launch a $700 million, five-year term loan for refinancing purposes. A $450 million, five-year asset-based revolver was to be marketed separately.

The overall recapitalization effort was to include a $250 million investment in new shares of YRC common stock at a price of $15 per share. But with the stock plunging today, that agreement would presumably need to be revised. YRC shares were down more than 20% at $12.01 in late morning trades, adding to losses over recent days. The shares were trading at $19.89 early on Jan. 7.

The new equity investors have the ability to back out of the deal at the earliest of Feb. 13, or when a default occurs on the loan agreement as a result of not refinancing the 6% convertible notes.

The TL had ticked higher this week, and increased from 95/96 on Dec. 9, following news that YRC had reached terms on the proposed new labor agreement with the Teamsters.

YRC may yet salvage its recapitalization if a revised agreement with the IBT can be reached. However, virtually every facet of the recapitalization plan would have to be reworked. – Abby Latour/Chris Donnelly


Bankruptcy: Advantage Rent-A-Car DIP lender wins auction for company’s assets

advantage-rent-a-car-franchise-opportunitiesAdvantage Rent-A-Car’s DIP facility lender, Catalyst Capital Group, won an auction for the company’s assets after submitting a revised offer under which, among other things, Catalyst agreed to waive the company’s existing defaults under the company’s DIP facility and agreed to continue lending to the company under a revised budget that the company said, “subject to certain limitations set forth on the record at the auction … significantly increases the debtor’s borrowing availability under the DIP Facility,” according to a court filing.

Catalyst is a Toronto, Canada-based private-equity firm focused on distressed situations.

As reported, Catalyst was the stalking-horse bidder for the company’s assets under which it agreed to credit bid the lesser of $46 million (the borrowing limit under the original DIP facility) or the amount of DIP obligations actually outstanding (see “Advantage DIP lender to act as stalking horse for asset sales,” LCD, Nov. 13, 2013).

As also reported, German car-rental company Sixt SE submitted the only competing qualified bid for the assets that, according to a court filing, was deemed to be a higher bid than the stalking-horse bid and was designated the so-called “auction baseline bid” (see “Advantage Rent-A-Car auction under way with opening bid from Sixt,” LCD, Dec. 9, 2013). The filing did not detail that bid, but according to the bidding procedures it would have included a $3.5 million overbid, determined by a $3 million break-up fee due to Catalyst and a $500,000 overbid requirement.

According to Catalyst’s revised asset-purchase agreement that the company said was the winning bid, the purchase consideration does not appear to have changed – it remains the lesser of $46 million or outstanding DIP obligations, plus the assumption of certain liabilities. But in a notice the company filed yesterday with the bankruptcy court overseeing its Chapter 11 case identifying the winning bid, the company said it deemed the revised Catalyst bid to be the “higher or otherwise better offer” after considering “all factors, including the amount of the purchase price, the likelihood of each bidder’s ability to close a transaction and the timing thereof, the form and substance of the purchase agreement requested by each bidder, and the net benefit to the debtor’s estate.”

A sale hearing for the assets of the company, identified in court filings as Simply Wheelz, LLC, is scheduled for Dec. 17 in Jackson, Miss. – Alan Zimmerman


Europe: EQT Holdings raises €845M for Credit II distressed fund

eqtEQT has raised €845 million for its EQT Credit II fund, exceeding the fund’s target of €750 million, according to a press release. The fund intends to invest primarily in stressed and distressed situations, including the debt of companies that may face challenges created by excess leverage or the need for additional capital. As such, it will continue the strategy employed by EQT Credit I and EQT V Credit Carve-Out.

Commitments for the fund, which is now closed, have come from new and existing investors, with more than 90% of this latter group committing to the new fund. Roughly 55% of EQT Credit II commitments have been raised from the Nordic region, with 20% from the rest of Europe, and 25% from the Americas. This is a broader investor base compared with that of the preceding fund, for which the investor base was predominantly Nordic.

Breaking down the investor group, pension funds and insurance companies account for more than 60% of the commitments in the fund. EQT Credit II is backed by a number of well-regarded international institutional investors including Access Capital Partners, Andrew W. Mellon Foundation, AP4, Finnish State Pension Fund (VER), Gamla SEB Trygg Liv, Lancashire County Pension Fund, Massena Capital Partners, OFI Asset Management, Sampo, and Talanx Asset Management, according to the release.

The fund intends to be a medium-term investor with a bias towards Northern Europe and illiquid or mid-market situations. Furthermore, it will seek to make investments relating to companies that it believes are operationally sound and will have consistent cash flows and/or meaningful intrinsic value.

Headed by Paul de Rome, the EQT Credit Team comprises 11 investment advisory professionals based in London and Stockholm. – Staff reports


YouTube, slides: October 2013 US Leveraged Loan Market Analysis

LCD’s video analysis detailing the US leveraged finance market during September is now on YouTube.

With interest rates trending lower during the month loan returns trailed those of high-yield and other fixed-income categories, reversing the pattern of the prior four months, when 10-year Treasury rates were on the rise. Looking ahead, most participants think supply is more likely to ebb than to rise in the out months of 2013.

This month LCD looks at:

  • Leveraged loan volume
  • Average bid of S&P/LSTA loan 100 index
  • S&P/LSTA Index loans outstanding
  • Visible inflows
  • New-issue clearing yields of first-lien loans
  • Covenant-lite share of  new issue volume
  • High yield bond prices
  • Loan default rate
  • M&A institutional loan forward calendar

The video is available here.

The URL for the video:

PDF slides of the video on Slideshare are available here.

URL for the slides:

(If you’re reading this on the video is at the end of this story.)

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Orchard Supply files Ch. 11, seeks Section 363 sale to Lowe’s

Orchard Supply Hardware Stores filed for Chapter 11 protection in Wilmington, Del., this morning, as part of a planned $205 million acquisition by Lowe’s Companies.

San Jose, Calif.-based Orchard will retain its brand and continue to operate as a standalone business under the proposed deal with Lowe’s. “Orchard’s neighborhood stores are a natural complement to Lowe’s strengths in big-box retail, offering smaller-format hardware and garden stores catering to the needs of local customers,” said Robert Niblock, chairman, president and CEO of Lowe’s. “Strategically, the acquisition will provide us with immediate access to Orchard’s high density, prime locations in attractive markets in California, where Lowe’s is currently underpenetrated, and will enable us to participate in a larger way in California’s economic recovery.”

Orchard’s initial court filings listed about $441 million in total assets stacked against $480 million in liabilities.

Wells Fargo Bank and Orchard’s term loan lenders are providing the company with a $177 million debtor-in-possession credit facility, Orchard said. As of its filing, Orchard had about $107 million outstanding under its senior secured revolver, about $54.7 million outstanding under the first tranche of its senior secured term loan, and a second tranche, including accrued PIK interest, with about $74.3 million outstanding.

Orchard also listed about $40.9 million in outstanding trade payables, which Lowe’s would assume under the deal.

Orchard traces its current economic troubles back to “substantial overleveraging” in 2006, when the company was still owned by Sears. Sears spun out Orchard at the end of 2011. The company began to reduce its debt and, with the help of a new management team, launched a new store prototype designed to capitalize on Orchard’s niche as a midsize store – smaller than the big-box operations of Lowe’s and Home Depot, but larger than the small local shops run by Ace and True-Value.

Still, California’s economic decline beginning in 2008, continued competitive openings by Home Depot and Lowe’s, and “chain-wide operational deficiencies” saw sales at Orchard stores fall from almost $850 million in 2007, to slightly more than $650 million in 2010, the company said.

Orchard is seeking court permission to conduct immediate store closing sales at eight of its 91 locations. Hilco Merchant Resources and Gordon Brothers Retail Partners will serve as the stalking-horse liquidators at an auction for the rights to conduct the sales, court filings show. Orchard is asking the court for an auction to be held June 27 and a sale-approval hearing on June 28.

Orchard also proposed an Aug. 14 Section 363 auction in the Manhattan office of DLA Piper for the remainder of its assets, with a sale hearing on Aug. 20. Under the current proposed bidding procedures, Lowe’s will be entitled to reimbursement of up to $850,000 in fees and expenses, and a break-up fee of $6.15 million, or 3% of its stalking-horse offer. Any competing bid must include the break-up fee and a further $5 million, for a total offer of about $216.5 million. Subsequent bids must be made in increments of at least $2 million.

Orchard is being advised by investment banker Moelis & Company, restructuring advisor FTI Consulting, and bankruptcy counsel DLA Piper. U.S. Bankruptcy Judge Christopher Sontchi has been assigned to oversee the case.

A hearing on the company’s first-day motions has been scheduled for June 18, in Wilmington, Del. – John Bringardner


School Specialty reorganization plan confirmed by bankruptcy court

The bankruptcy court overseeing the Chapter 11 proceedings of School Specialty yesterday confirmed the company’s reorganization plan, according to a court order filed in the case.

According to a second amended plan, also filed yesterday, the cash component payable to DIP lenders under the plan was increased to $98.3 million, versus $88.3 million under the prior version, as a result of the upsizing of the company’s exit term loan to $145 million, from $125 million.

As reported, lenders under the $155 million DIP are to receive the cash plus 65% of the company’s equity. A valuation by the lenders’ financial advisor, GLC Advisors & Co., valued the reorganized company in a range of $300-340 million, with a midpoint of $320 million.

As also reported, that midpoint, along with the company’s $145 million exit term loan, would result in an equity distribution value of $107.7 million, which in turn would result in a recovery to DIP lenders of $168 million, or about 108% (for a more complete analysis of recoveries, see “School Specialty panel’s valuation helps explain recent plan changes,” LCD, May 23, 2013).

According to a letter from the DIP lenders to the company, however, the DIP lenders said they “adopted” an enterprise value midpoint of $300 million for purposes of allocating the equity split between DIP lenders and convertible noteholders, which would result in a par recovery for DIP lenders. – Alan Zimmerman