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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Ares Corp. details 3Q15 portfolio stats, books $1.5B in new deals

Ares Corp. (NASDAQ: ARCC) booked $1.52 billion in new business during the third quarter, at an average interest rate of 7.8%, the lender detailed in its 10-Q filing yesterday alongside earnings. Exits totaled $1.34 billion, for net new investments of $183 million.

The 7.8% is 20 bps inside second-quarter investments, reflecting the better market conditions that borrowers enjoyed prior to the post-Labor Day correction. Spreads have since widened and should build up the average for fourth-quarter deals. In October, management said it funded $305 million in new investments for the fourth quarter at an average yield of 11.4%, while exiting $152 million at 8%.

First-lien commitments took a 75% share of third-quarter transactions, up from 37%, as ARCC shifted bookings away from the SSLP fund as that joint-venture with GE Capital winds down. Second-liens accounted for 21% of investments, down from 28% in the second quarter.

As of Oct. 29, the lender said it has $630 million in its backlog, which includes transactions that are approved, mandated or have a signed commitment that has been issued and that ARCC believes likely to close. There is an additional $425 million in the pipeline, which includes transactions that are in process, but have no formal mandate or signed commitment.

Portfolio stats
ARCC’s overall portfolio grew to $8.7 billion in assets, from $8.6 billion. The number of investments increased by nine, to 216. Average EBITDA per company is $58.8 million. As of June 30, 66% of the borrowers in ARCC’s portfolio generated less than $55 million of EBITDA.

Petroflow lifted ARCC’s loans on non-accrual status to 2.3% ($195 million) of the portfolio at cost, from 1.7%. Petroflow is one of three companies that ARCC considers true oil-and-gas-related investments, which account for roughly 3% of the portfolio. ARCC’s Petroflow investment is a first-lien position that was originated in July last year prior to the dramatic decline in oil prices. ARCC said it is working with the company and lender group to restructure Petroflow’s balance sheet. The principal investment totals $53.2 million. ARCC booked the 12% paper at a cost of $49.7 million, and the deal is now marked at a fair value of $37.9 million.

BDCs were not excluded from stock market volatility in the third quarter. ARCC’s stock slid to a 14% discount to NAV, from a 2% gap in the previous quarter. The stock closed the third quarter at $14.48, versus a book value of $16.79. The stock has since rebounded, to $15.49, to narrow the discount to 8%. By comparison, the BDC sector as a whole is trading at a roughly 15% discount. — Kelly Thompson


LCD’s High Yield Market Primer/Almanac Updated with 3Q Charts

LCD’s online High Yield Bond Market Primer has been updated to include third-quarter 2015 and historical volume and trend charts.

The Primer can be found at, LCD’s free website promoting the asset class. features select stories from LCD news, weekly trends, stats, and analysis, along with recent job postings.

We’ll update the U.S. Primer charts regularly, and add more as the market dictates (new this time around: an historical look at Fallen Angels, courtesy S&P).

Charts included with this release of the Primer:

  • US High Yield Issuance – Historical
  • 2015 High Yield Issuance, by Purpose
  • High Yield LBO Issuance
  • Fallen Angels – Historical
  • Cash Flows to High Yield Funds, ETFs
  • PIK Toggle Issuance (or lack thereof)
  • Yield to Maturity: Historical, Recent

LCD’s Loan Market Primer and High Yield Bond Market Primer are some of the most popular pieces LCD has published. Updated annually (print) and quarterly (online) to include emerging trends, they are widely used by originating banks, institutional investors, private equity shops, law firms and business schools worldwide.

Check them out, and please share them with anyone wanting an excellent round-up of or introduction to the leveraged finance market.


Like smaller peers, larger companies’ earnings likely slowed in 3Q

An index tracking private middle market companies has foreshadowed a slowdown in revenue and earnings of larger public companies in the third quarter of 2015.

“We expect to see the theme of slower growth play out this earnings season,” said Edward Altman, the Max L. Heine Professor of Finance, Emeritus at the NYU Stern School of Business.

“Middle market companies have historically outperformed their larger public peers, so we anticipate relatively low year-over-year revenue and especially EBITDA growth from S&P component companies in the third quarter,” said Altman.

Altman collaborated with Golub Capital on the Golub Capital Altman Index, which was featured today in the second edition of the quarterly Golub Capital Middle Market Report, which includes an analysis of the index. The index is based on the sales and earnings data of roughly 150 private U.S. companies in Golub Capital’s loan portfolio.

The index showed revenue of privately held middle market companies increased 7.95% year-over-year in the first two months of the third quarter of 2015, compared to 9.26% in the first two months of the second quarter of 2015.

EBITDA rose by 3.95% in the third quarter, compared to an increase of 6.93% year-over-year during the first two months of the second quarter of 2015.

Still, the index shows that private middle market companies remain a resilient driver of economic growth, said Lawrence Golub, Golub Capital’s CEO.

“While revenues and earnings in the period grew at a healthy pace, margins continued to be pressured by such factors as rising labor costs and the strength of the U.S. dollar, which is impacting the pricing power of U.S. firms with international competitors,” Golub said.

The index showed an 8.84% increase in revenue and a 9.88% increase in earnings for the healthcare sector. This was probably due to the Affordable Care Act, which increased access to health care services, the report said.

Revenue of private middle market industrial companies fell 0.68% year-on-year in the third quarter, and earnings of industrial companies fell 1.62%.

Revenue of private middle market information technology companies rose 6.65%, but earnings slumped 3.62%.

“The information technology sector saw negative profit growth, reflecting, we believe, greater investment in product development,” said Golub.

The index contains limited exposure to the financials, utilities, energy, and materials sectors. Thus, calculations are made for the public indexes both including and excluding these sectors.

The index “is the first and only index based on actual sales and earnings data for middle market companies,” the report said.

“The index has served as a reliable indicator of the overall growth rates in revenue and earnings of public companies in market indexes such as the S&P 500 and S&P SmallCap 600, as well as quarterly GDP, according to statistical backtesting dating back to 2012, when data began to be tracked,” the report said. — Abby Latour

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New Capital Southwest BDC to stand out by geography, partnership

It is not lost on Capital Southwest’s management that they are latecomers in the credit cycle to the increasingly crowded playing field of middle-market lending.

The company is undergoing a transformation that will create two publicly traded entities: an internally managed BDC that will focus on lending to middle-market companies and retain the Capital Southwest name, and a diversified growth company called CSW Industrials.

Shareholders of Capital Southwest will receive stock in CSW Industrials as a tax-free dividend. Shares in CSW Industrials are due to begin trading on Oct. 1 on NASDAQ under the ticker symbol CSWI. The company split was unveiled in December 2014.

On the eve of the transaction, management says they are prepared for the challenges.

“We wake up every morning with the worry about entering late in the credit cycle,” Bowen Diehl said. Diehl, the company’s chief investment officer hired in early 2014, will become CEO of the new Capital Southwest. Michael Sarner, hired in July, will become CFO following the spin-off. Both Diehl and Sarner previously worked at American Capital. “But we’re buyers of assets, so maybe the sell-off will take some of the froth out of the market.”

At least initially, the Dallas-based company will use geography to differentiate itself, originating most of transactions from a network of relationships in the southwest and southern U.S. Although Texas-based, they have little energy exposure among legacy equity investments.

They plan to assemble a granular credit portfolio across asset classes and industries.

To execute their plan, Capital Southwest announced a partnership this month with rival BDC Main Street Capital, based in Houston. Capital Southwest will initially inject $68 million into the joint-venture fund, and Main Street, $17 million. Capital Southwest will own 80% of the fund, and share in 75.6% of profits. Main Street will own 20%, and have a profits interest of 24.4%.

“Main Street has a robust and well-established origination platform in first-lien syndicated credits. To develop that, we’d have to hire three to four people. We think this is a win-win for shareholders of both Capital Southwest and Main Street,” said Diehl in an interview.

In January, Capital Southwest hired Douglas Kelley, who had been a managing director in American Capital’s sponsor finance practice for middle market companies. In June, Capital Southwest announced the hiring of Josh Weinstein from H.I.G. WhiteHorse, to source direct-lending and middle-market syndicated credits. Capital Southwest also expanded their team with the hiring of a couple of associates.

Thus, Capital Southwest’s team is largely set for the near term.

As part of the transition, Capital Southwest has divested $210 million of equity investments in the past 15 months, realizing $181 million of capital gains. In the future, equity exposure in the investment portfolio will be capped at 10-15%.

“We are no longer a buy-and-hold-indefinitely investment company,” said Diehl.

The company has already begun to ramp up the new credit portfolio, investing $42 million in eight middle-market credit investments.

Among these investments are a $7 million, second-lien loan (L+875) to data collection company Research Now; a $7 million second-lien loan (L+925) to Boyd Corp.; a $5 million second-lien loan (L+800) to retailer Bob’s Discount Furniture; and a $5 million second-lien loan (L+775) to Cast & Crew Entertainment Services. New credit investments include a direct loan to Freedom Truck Finance, as a $5.4 million last-out senior debt (P+975), and industrial supplier Winzer, as $8.1 million, 11% subordinated debt.

Capital Southwest’s credit portfolio will eventually be middle-market loans roughly balanced between lower-middle-market companies generating EBITDA of $3-15 million, and upper-middle market companies generating EBITDA of more than $50 million.

The company’s largest legacy equity investment is Media Recovery, which is the holding company of ShockWatch. The Dallas-based company manufactures indicators and recording devices to measure impact, tilt and temperature during transit. The fair value of the equity investment was roughly $30 million as of June 30.

Setting up the Main Street joint venture early in the transformation process has been positive. Moreover, Capital Southwest has $105 million of cash to investment after the $68 million committed to the Main Street joint venture.

“We are focused on strong credits. We are not in a hurry to put cash to work, but rather thoughtfully constructing a portfolio which produces a consistent market dividend for our shareholders,” said Sarner, CFO of the new company. –Abby Latour

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Loan bids post second-consecutive drop as high yield bonds, equities slide

Amid slightly softer market conditions, the average bid of LCD’s flow-name composite dipped 17 bps over the past two trading sessions, to 98.22% of par, from 98.39 on Sept. 22.

The composite was biased toward the downside, with decliners outnumbering advancers 12 to one; two loans were unchanged from the previous reading. The Neiman Marcus term loan due 2020 (L+325, 1% LIBOR floor) and theIntelsat term loan due 2019 (L+275, 1% LIBOR floor) posted the steepest losses at a half-point each, both dropping to a 98.25 bid.

The average bid is down 26 bps on the week, though remains seven basis points above its recent low of 98.15 on Aug. 26.

With high-yield and equities under pressure, the loan market has eased a bit after pushing higher earlier in the month, though the losses have been most heavily skewed toward certain high-beta names or those with headline risk, underscoring today’s heavily bifurcated market conditions.

While the weakness in high-yield and equities helped put a damper on sentiment in the loan market, it’s also worth noting that CLO issuance has slowed appreciably this month while outflows from loan mutual funds persist. So far in September, a mere $2.76 billion of deals have priced. Meanwhile, for the five business days ended Sept. 23, LCD data project a $419 million net outflow per the Lipper sample of weekly reporters.

The loan market overall, however, has well outperformed high-yield: the average bid of LCD’s flow-name bond composite tumbled 186 bps in today’s reading, to a fresh 2015 low of 94.44%.

With the average loan bid decreasing 17 bps, the average spread to maturity advanced five basis points, to L+432.

By ratings, here’s how bids and the discounted spreads stand:

  • 99.65/L+365 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+363.
  • 96.06/L+552 for the six loans rated B or lower by one of the agencies; STM in this category is L+520.

Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds dove 186 bps, to 94.44% of par, yielding 8.53%, from 96.30 on Sept. 22. The gap between the bond yield and discounted loan yield to maturity stands at 426bps. – Staff reports

To-date numbers

  • September: The average flow-name loan lifted seven basis points from the final August reading of 98.15.
  • Year to date: The average flow-name loan increased 130 bps from the final 2014 reading of 96.92.

Loan data

  • Bids lower: The average bid of the 15 flow names fell 17 bps, to 98.22% of par.
  • Bid/ask spreads wider: The average bid/ask spread widened one basis point, to 35 bps.
  • Spreads rise: The average spread to maturity – based on axe levels and stated amortization schedules – gained five basis points, to L+432.

Battle heats up over management fees from TICC Capital

A fight is heating up over lucrative management fees from TICC Capital.

TICC Capital is a business development company that invests in debt through syndicated bank loans and debt and equity of CLOs. It is managed by TICC Management, which collects a 2% base fee annually, as well as an incentive fee. As of June 30, $5.3 million was due to TICC Management in advisory fees for the quarter, in line with the fee for the same quarter a year earlier.

In early August, TICC Capital announced an affiliate of Benefit Street Partners would acquire TICC Management. Benefit Street Partners is the credit investment arm of Providence Equity Partners. UBS Investment Bank advised TICC Management on the transaction.

Soon after, NexPoint Advisors submitted a proposal to the board of TICC Capital for a management agreement that would cut advisory fees by an estimated $35 million and include a $10 million investment in TICC Capital shares. NexPoint later sweetened its offer. NexPoint is an affiliate of Highland Capital Management.

Benefit Street Partners followed up with a revised offer, saying the base fee would be cut to 1.5% annually, from 2%, permanently. The offer would include an investment in TICC Capital of at least $20 million through common stock purchases over the next year. Benefit Street Partners would transition TICC Capital’s strategy to private debt investments.

A special committee for TICC Capital’s board of directors unanimously supported the new agreement with Benefit Street, a Sept. 3 statement said.

Now, a new party has entered the fray.

TPG Specialty Lending unveiled a stock-for-stock bid for TICC Capital Corp., saying the offer was superior to the competing proposals from Benefit Street Partners and NexPoint.

Under terms of the offer, released today, TICC stockholders would receive common stock of TPG Specialty Lending equivalent to $7.50 in value, or a 20% premium to TICC Capital’s Sept. 15, 2015, closing stock price. TPG Specialty Lending shares, which trade on NYSE under the ticker symbol TSLX, eased $0.12 today, to $17.23, while the broader market indices were higher.

TPG Specialty Lending publicized its offer today, after proposing the offer privately to the special committee of TICC Capital’s board. TPG Specialty Lending added that the TICC special committee had rejected the offer.

But TPG Specialty Lending has urged the board to reconsider, arguing the transaction would result in long-term value for both shares, in addition to the immediate premium for TICC stockholders.

“TSLX remains fully committed to pursuing this transaction for the benefit of all stockholders and urges the special committee to enter into constructive discussions with TSLX pursuant to its fiduciary duties,” TPG Specialty Lending said in a statement today.

At a special meeting of TICC shareholders on Oct. 27, TPG Specialty Lending said it intends to solicit support to block the Benefit Street Partners’ proposal.

“We agree with NexPoint that stockholders should reject the Benefit Street Partners proposal. However, the NexPoint proposal is equally flawed as both transactions provide returns only for external managers and offer no immediate value to stockholders,” TPG Specialty Lending said in a statement.

Shares in TICC Capital closed higher today, at $6.87, up nearly 10%, in firmer market conditions. Still, they are trading at a discount to net asset value, which was $8.60 per share as of June 30. – Abby Latour

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High yield bond market in Aug: slow issuance, wider spreads

High-yield issuance in August was $10.2 billion, barely surpassing the $10 billion of volume in July but outpacing the $3.1 billion priced last August, LCD data shows. Note that issuance concluded on Aug. 19, when KIK Custom Products priced the last deal before the late summer shutdown. August is now the second slowest month of the year, next to July, with June the third slowest month at $21.2 billion. For the year-to-date, volume in 2015 through August is 1.4% behind last year’s pace, at $205.85 billion versus $208.80 billion. That gap has narrowed from the 5% decline at the end of July, but prior to July, volume had been running ahead of the pace for 2014.

Recall July’s slowdown was tied to commodities volatility, China’s stock market plunges, and early in the month, fears of a default in Greece. In August, those issues, apart from Greece, took an even greater toll on the market, and the debate continues over whether the Fed will raise interest rates in September. More participants are taking the view, given the latest disruptions in global markets, that it won’t.

Had the high-yield primary market not already shut down by Aug. 19, the tough conditions late-month would have certainly prevented issuers from tapping the market regardless. Already, several of the 19 deals that priced in August had to come with healthy concessions as investors pushed back amid tough conditions. As seen in June and July, the bulk of issuance came from time-sensitive M&A and LBO issuers, to represent 39% of total volume for the month, although dividend and recapitalization/stock repurchase use of proceeds both grew as compared to previous months.

The yield to worst on the S&P U.S. Issued High-Yield Index finished the month much wider at 7.17%, from 6.59% on July 31. The option-adjusted spread widened to T+573, from T+511 at the end of July. – Joy Ferguson/Matt Fuller

HY market in Aug


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


Loan bids post fourth consecutive drop amid outflows, slowing CLO issuance

The average bid of LCD’s flow-name composite fell 11 bps in today’s reading to 98.78% of par, from 98.89 on Tuesday, Aug. 11.

Among the 15 names in the sample, eight declined, three advanced, and four were unchanged from the prior reading. Avaya’s B-7 term loan due 2020 (L+525, 1% floor) was once again the biggest mover in either direction, falling another point in today’s reading to an 88.5 bid, extending losses on its 3Q results released last week amid the volatile market conditions.

After losses deepened Wednesday morning, loans began clawing back losses yesterday afternoon, with the recovery continuing today, as some buyers stepped in to capitalize on the recent weakness.

Overall, the market has had a slightly negative bias in recent sessions with loan mutual funds recording outflows and CLO issuance slowing, while traders also say that some high-yield and crossover accounts have been selling loans amid the recent downdraft in high-yield. Lipper last week reported an outflow of $594 million, the largest in 26 weeks, and the market appears poised for an even more considerable outflow this week. LCD data project an outflow, per the Lipper sample of weekly reporters, of $775 million for the five days ended Aug. 12.

With prices well off recent highs – the percentage of performing Index loans bid at par or higher fell to 23.1% as of yesterday’s close, from 40.6% a week earlier and 54% three weeks ago – some accounts are viewing the recent weakness as a buying opportunity, and there’s speculation that today’s relative bargains could revive the lackluster CLO issuance as of late. Regardless, buyers began coming out of the woodwork.

Nevertheless, this recent secondary weakness has bled into the primary market. While there’s ample demand to get deals done, issuers and arrangers can’t be as aggressive as they might have been a week ago, especially with a few recently issued deals that cleared tight relative to their ratings profiles bid below their issue prices, such as Pharmaceutical Product Development and HD Supply.

With the average loan bid tumbling 11 bps, the average spread to maturity gained two basis points, to L+415.

By ratings, here’s how bids and the discounted spreads stand:

  • 99.63/L+367 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+365.
  • 97.52/L+499 for the six loans rated B or lower by one of the agencies; STM in this category is L+474.

Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds dropped 40 bps, to 97.47% of par, yielding 7.48%, from 97.87 on Aug 11. The gap between the bond yield and discounted loan yield to maturity stands at 327 bps. – Staff reports

To-date numbers

  • August: The average flow-name loan fell 87 bps from the final July reading of 99.65.
  • Year to date: The average flow-name loan rose 186 bps from the final 2014 reading of 96.92.

Loan data

  • Bids decrease: The average bid of the 15 flow names slipped 11 bps, to 98.78% of par.
  • Bid/ask spread expand: The average bid/ask spread grew, to 38 bps.
  • Spreads higher: The average spread to maturity – based on axe levels and stated amortization schedules – inched up two basis points, to L+415.