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In rare move, Apollo moves Magnetation DIP loan to non-accrual

Apollo Investment moved a DIP loan to iron ore miner Magnetation to non-accrual in the recent quarter, an SEC filing showed.

A $13 million 12% PIK loan to Magnetation was marked at a fair value of $12.3 million as of Sept. 30. However, as of Dec. 31 the fair value of the loan was reduced to $6.6 million, and the loan was classified as non-accrual in the portfolio.

Asked about the investment during an earnings call, CEO Jim Zelter said the situation was “ongoing,” and declined to disclose further details.

Apollo’s investment in Magnetation also included $32.6 million of 11% first-lien debt due 2018, marked with a fair value of $1.8 million as of Dec. 31, versus $6.1 million as of Sept. 30. However, this debt had already been considered non-accrual.

Grand Rapids, Minn.–based Magnetation filed for Chapter 11 in May 2015.

Apollo Investment, a BDC that trades on Nasdaq under the symbol AINV, invests in senior loans, subordinated and mezzanine debt, and equity of middle-market companies. — Abby Latour

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Midstates Petroleum Draws Down $249.2M Remaining on Revolving Loan

Midstates Petroleum today disclosed it has borrowed the remaining $249.2 million available under its revolving credit facility. Proceeds of the facility are earmarked for general corporate purposes.

The aggregate amount outstanding under the credit facility is approximately $252 million, including approximately $2.8 million of outstanding letters of credit. The company’s cash balance, as of Feb. 9, was $335.7 million, according to an SEC filing.

SunTrust Bank is administrative agent.

Midstates in May issued a privately placed $625 million offering of 10% second-lien notes to a small group of investors alongside an uptier exchange of some of its outstanding unsecured notes for partial-PIK third-lien notes. Prior to today’s draw-down disclosure, the second-lien notes due 2020 were pegged in a mid-to-high 20s context.

Midstates Petroleum engages in the exploration, development, and production of oil, natural gas liquids, and natural gas in the United States. It primarily focuses on oilfields in the Mississippian Lime trend in northwestern Oklahoma; the Anadarko Basin in Texas and Oklahoma; and the Upper Gulf Coast Tertiary trend in central Louisiana. The company is rated CCC+/Caa1, with stable outlook on both sides. – Rachelle Kakouris

Follow Rachelle on Twitter for distressed debt news and insight. 

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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Sign of the Times: Where do Endownments/Foundations See 2016 Opportunity: Distressed Debt

2016 opportunities

Endowments and foundations generally are pessimistic about the 2016 economic environment, though they do see a few potential bright spots. Chief among them: Distressed debt.

“Investors believe there are opportunities for return in select asset classes for those willing to move quickly and look past short-term noise,” said Cathy Konicki, head of the NEPC’s endowment and foundation practice group. The NEPC is consulting firm that conducting a survey of endowments/foundations, on which the above responses are based. – Staff reports

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Gladstone restructures loans in Galaxy Tool, Tread; sells Funko

Gladstone Investment Corporation has restructured investments in Galaxy Tool and Tread Corp. in the recent fiscal quarter, exchanging debt holdings for equity, an SEC filing showed.

Gladstone Investment booked a realized loss of $10.5 million when the lender restructured its investment in Galaxy Tool. Debt to Galaxy Tool with a cost basis of $10.5 million was converted into preferred equity with a cost basis and fair value of zero through the restructuring transaction, the SEC filing showed.

Galaxy Tool, based in Winfield, Kan., manufactures tooling, precision components, and molds for the aerospace and plastics industries.

An investment in Tread included debt with a cost basis of $9.26 million. This was also converted into preferred equity. Gladstone Investment realized a loss of $8.6 million through the transaction.

Tread was Gladstone Investment’s sole non-accrual investment as of Sept. 30. As of Dec. 31, 2015, a revolving line of credit to Tread remained on non-accrual. Tread remains Gladstone Investment’s sole non-accrual investment.

Based in Roanoke, Va., Tread manufactures explosives-handling equipment including bulk loading trucks, storage bids, and aftermarket parts.

Also in the quarter, Gladstone Investment sold an investment in bobblehead and toy maker Funko, realizing a gain of $17 million. Gladstone Investment received cash of $14.8 million and full repayment of $9.5 million in debt as part of the sale.

Gladstone Investment Corporation, based in McLean, Va., is an externally managed business development company that trades on the Nasdaq under the ticker GAIN. The BDC aims for significant equity investments, alongside debt, of small and mid-sized U.S. companies as part of acquisitions, changes in control, and recapitalizations. — Abby Latour

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2016 European Distressed Debt Outlook: No Spike in Leveraged Loan, High Yield Defaults

european distress ratio

High-yield bonds will be under the European restructuring spotlight in 2016, with signs of more distress having emerged recently due to weaker U.S. markets as well as expected troubles in Europe – especially in those sectors vulnerable to weak commodity prices or low consumer spending.

Nevertheless, European bond and loan defaults are not expected to spike next year as ECB measures should keep markets well supported, while low commodity prices will actually have a positive impact on many sectors, be it through lower raw-material costs or an associated pick-up in consumer spending.

According to a recent LCD survey, loan managers’ forecasts for defaults point to a rate of 2–3% by the end of 2016, compared to the current default rate of 2.1% in LCD’s European Leveraged Loan Index (ELLI). S&P Ratings Services expects a rise in the European public corporate speculative-grade default rate to 2.4%, from 1.5% currently.

Despite the benign outlook, the rapid growth of the high-yield market in recent years, riskier credit profiles, rising leverage multiples (adding just over half a turn to 4.6x on average for new issues since the start of 2013, according to LCD), and slower-than-expected economic growth in Europe indicate that the market will see some credit troubles next year.

European credit conditions started showing signs of weakness in the second half of this year, with the ratio of bond distress rising. – Isabell Witt

This story is part of LCD’s complete European Distressed Market Analysis, available to LCD News subscribers. 

Along with the loan/bond distress ratio the story details

  • Primary market bond yields
  • Bond ‘maturity wall’
  • Outstanding bonds, by industry
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Third Ave’s liquidating debt fund holds concentrated, inactive paper

The leveraged finance marketplace is abuzz this morning ahead of a conference call to address to a plan of liquidation for the Third Avenue Focused Credit mutual fund following big losses this year, mild losses last year, heavy redemptions, and now a freeze on withdrawals. The news was publicly announced last night by the fund, and there will be a call at 11 a.m. EST for shareholders with lead portfolio manager Thomas Lapointe, according to the company.

Market sources yesterday relayed rumors of a near-$2 billion redemption from the asset class, and as one sources put forth, “the odd thing was it was difficult to trace the money that left, what was sold, and where it went.”

That was followed up by last night’s whopping, $3.5 billion retail cash withdrawal from mutual funds (72%) and ETFs (18%) in the week ended Dec. 9, according to Lipper, although it’s not entirely clear if that figure—the largest one-week redemption in 70 weeks—can be linked to Third Avenue. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

Nonetheless, it’s worthy of a dive into the open-ended fund, which trades under the symbol TFVCX. The fund shows a decline of 24.5% this year, versus the index at negative 2.94%, after a 6.3% loss last year, versus the index at positive 2.65%, according to Bloomberg data and the S&P U.S. Issued High Yield Corporate Bond Index.

It’s an alternative fixed-income fund that’s “extremely concentrated,” and “hardly representative of a ‘high yield’ or ‘junk bond’ fund,” outlined Brean Capital’s macro strategist Peter Tchir in a note to clients this morning. He highlighted that Bloomberg analytics show a portfolio that’s almost 50% unrated, nearly 45% tiered at CCC or lower, and just 6% of holdings rated BB or B.

The holdings are all fairly to extremely off-the-run, hence the trouble selling assets to meet redemption, and thus, the liquidation. The remaining assets have been placed into a liquidating trust, and interests in that trust will be distributed to shareholders on or about Dec. 16, 2015, according to the company.

Top holdings follow, and none have traded actively or very much in size of late, trade data show:

  • Energy Future Intermediate Holdings 11.25% senior PIK toggle notes due 2018; recent trades in the Ch. 11 paper were at 107.5.
  • Sun Products 7.75% senior notes due 2021; recent trades were at 87.5, versus 90 a month ago and the low 70s a year ago.
  • iHeartCommunications 14% partial-PIK exchange notes due 2021; block trades today were at 30 and 32, from 27 last month.
  • New Enterprise Stone & Lime 11% senior notes due 2018; odd lots traded recently in the low 80s, versus mid-80s last month.
  • Liberty Tire Recycling 11% second-lien PIK notes due 2021 privately issued in an out-of-court restructuring; trades reported in the mid-60s.

Amid those any many others of a similar ilk, the fund also reports a holding in Vertellus B term debt due 2019 (L+950, 1% LIBOR floor). The chemicals credits put the $455 million facility in place in October 2014 as part of a refinancing effort, pricing was at 96.5, and it’s now at 78/82, sources said.

“Investor requests for redemption … in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders,” according to the company statement.

“In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions,” the statement outlined.

Further details are available online at the Third Avenue Management website. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.

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Leveraged Loan Distress Ratio inching toward recent highs

distressed loan ratio

Leveraged loan default rates in the U.S. have been hanging at or near historical lows for some time (especially when taking default behemoth EFH out of the mix).

The Leveraged Loan Distress ratio is another story, however. This ratio tracks loans bid below 80% of par in the secondary market. As is evident in the chart, the Distress ratio has spiked noticeably since this summer. – Staff Reports

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High yield bond prices fall further as some constituents notch large declines

The average bid of LCD’s flow-name high-yield bonds fell 132 bps in today’s reading, to 89.03% of par, yielding 10.58%, from 90.35% of par, yielding 10.05%, on Nov. 19. Performance within the 15-bond sample was deeply negative, with 12 decliners against two gainers and a lone constituent unchanged.

Today’s decline is a seventh-consecutive observation in the red, and it pushes the average deeper below the previous four-year low of 91.98 recorded on Sept. 29. As such, the current reading that has finally pierced the 90 threshold is now a fresh 49-month low, or a level not seen since 87.93 on Oct. 4, 2011.

The decrease in the average bid price builds on the negative 58 bps reading on Thursday for a net decline of 190 bps for the week. Last week’s losses were also heavy, so the average is negative 369 bps dating back two weeks, and the trailing-four-week measure is much worse, at negative 545 bps.

Certainly there has been red across the board, but several big movers of late continue to greatly influence the small sample. For example, in today’s reading, Intelsat Jackson 7.75% notes were off six full points—the largest downside mover today, to 44, and now 20.5 points lower on the month—while Hexion 6.625% paper was off five points, at 73.5, and Sprint 7.875% notes fell 5.5 points, to 77.

The market has been crumbling especially hard this week, with energy and TMT credits leading the charge, amid a lack of participation, the influence of speculative short-sellers, and despite signs that retail cash has been flowing into the asset class. There was a similar dynamic after Thanksgiving last year, sending the average to the year-end low of 93.33 on Dec. 16, 2014.

As for yield in the flow-name sample, the plunge in the average price—with many names falling into the 80s and a couple of others more deeply distressed—has prompted a surge in the average yield to worst. Today’s gain is 53 bps, to 10.58%, for a 2.92% ballooning over the trailing four week. This is a 13-month high and level not visited since 10.70% recorded on June 10, 2010.

The average option-adjusted spread to worst pushed outward by 47 bps in today’s reading, to T+791, for a net widening of 167 bps dating back four weeks. That level represents a wide not seen since the reading at T+804 on Sept. 23, 2010.

Both the spread and yield in today’s reading remain much wider than the broad index. The S&P U.S. Issued High Yield Corporate Bond Index closed its last reading on Monday, Nov. 23, with a yield to worst of 7.88% and an option-adjusted spread to worst of T+652.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell nine bps, to 96.31% of par, for a discounted loan yield of 4.42%. The gap between the bond yield and discounted loan yield to maturity is 616 bps. — Staff reports

The data

Bids fall: The average bid of the 15 flow names dropped 132 bps, to 89.03.
Yields rise: The average yield to worst jumped 53 bps, to 10.58%.
Spreads widen: The average spread to U.S. Treasuries pushed outward by 47 bps, to T+791.
Gainers: The larger of the two gainers was Valeant Pharmaceuticals International 5.875% notes due 2023, which rebounded 3.25 points from the recent slump, to 85.25.
Decliners: The largest of the 12 decliners was Intelsat Jackson 7.75% notes due 2021, which dropped six full points, to 44, amid this fall’s ongoing deterioration of the credit.
Unchanged: One of the 15 constituents was unchanged in today’s reading.

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Garrison moves Speed Commerce, Forest Park Medical to non-accrual

Two of Garrison Capital’s investments, Speed Commerce and Forest Park Medical Center, were on non-accrual status in the recent quarter.

The investment in Speed Commerce comprised a $12 million term loan due 2019 (L+1,100 PIK, 1% floor) as of Sept. 30, a 10-Q showed. The fair value was marked at $9.7 million as of Sept. 30, and it accounted for 3.9% of assets.

In November 2014, Garrison Loan Agency Services was agent on a $100 million credit facility. Proceeds backed an acquisition of Fifth Gear and refinanced debt. Speed Commerce, based in Texas, provides web design and warehouse logistics services.

Nasdaq-listed Speed Commerce announced in April it hired Stifel, Nicolaus & Company as an advisor to explore a possible recapitalization or a sale of the company. Lenders have amended the loan several times, culminating on Nov. 16, when lenders agreed to a covenant requiring a sale of the company by Dec. 11.

Garrison Capital’s non-accrual investment in Forest Park included a lease to the San Antonio, Texas hospital and a $1.95 million term loan. The hospital has filed for bankruptcy due to a liquidity shortfall stemming from delays in obtaining third-party insurance contracts, and has hired an advisor to sell the facility.

Garrison Capital’s net asset value per share totaled $14.92 as of Sept. 30, compared to $15.29 as of June 30.

Garrison management attributed nearly half of the decline to a restructuring of SC Academy. Last quarter, that investment, a loan to Star Career Academy, was the lone non-accrual investment in the portfolio.

Star Career Academy, based in Berlin, N.J., provides occupational training for entry-level employment in health fields, cosmetology, professional cooking, baking and pastry arts, and hotel and restaurant management.

Garrison Capital is an externally managed BDC that invests in debt securities and loans of U.S. middle market companies. Shares trade on Nasdaq under the ticker symbol GARS. For additional analysis of Garrison Capital’s investment portfolio, see also “ActivStyle, Connexity loans added to Garrison Capital portfolio,” LCD News, Nov. 17, 2015. — Abby Latour

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City National Bank hires Chiavetta for capital finance team

City National Bank hired Cathy Chiavetta to source and underwrite asset-based loans.

She started this month and joined as a senior vice president, based in New York. She will report to Martin Chin, who is based in Los Angeles and manages the capital finance team.

Chiavetta is responsible for both large syndicated transactions and club deals.

Previously, Chiavetta was a managing director at Z Capital Partners, where she sourced distressed senior secured debt investments. She also held sales, capital markets, and underwriting roles at Banc of America Securities, CIT Group, and TD Securities. — Abby Latour

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