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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

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more

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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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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Antares Capital to expand junior debt offering under new owner

Antares Capital will expand its product offering in subordinated, or junior debt under new ownership by the Canada Pension Plan Investment Board (CPPIB).

Antares Capital expects to underwrite, and potentially hold, second-lien and mezzanine debt as a result of the new partnership, according to David Brackett and John Martin, who will lead the group under its new owner. Historically, GE Capital and GE Antares had almost focused entirely on senior secure loans.

After weeks of speculation over who would buy the business, GE today announced plans to sell Antares Capital to CPPIB as part of a $12 billion transaction. Speculation had focused on a non-bank lender as the buyer of pieces of the GE Capital assets up for sale, including of a company trying to enter middle market lending.

In buying the GE business, CPPIB makes a debut in the U.S. middle market business with a splash. GE Capital has long reigned as the dominant player in the middle market lending, defined by LCD as lending to companies that generate EBITDA of $50 million or less, or $350 million or less by deal size, although definitions vary among lenders.

Until now, CPPIB’s focus had been on larger deals. Its junior debt business included high-yield bonds and mezzanine debt. Since 2009, CPPIB’s credit investments have totaled $17 billion, through primary and secondary market purchases. CPPIB’s credit investments are managed by a team of 36 globally.

CPPIB will retain Antares’ team. Antares employs around 300, led by managing partners Brackett and Martin, who have led Antares since its formation. Antares will operate as an independent, stand-alone company.

Moreover, Antares will strengthen its unitranche loan product via the new partnership.

“CPPIB Credit Investments will stand ready to immediately invest follow-on capital into Antares post-closing to support origination of unitranche loans for its clients at scale, as we believe this is a differentiated product that will support Antares’ market leading position,” CPPIB said in a statement today.

Any impact on middle market lending overall as a result of GE Capital’s exit is likely to be minimal.

“There truly isn’t going to be any void. Whatever we’ve been able to provide in the past is what we’ll be able to provide in the future,” said Martin in an interview with LCD News.

The Antares purchase will open CPPIB’s credit investment portfolio to the U.S. middle market. GE Antares specializes in middle market lending to private-equity-backed transactions.

“They had been studying the market for some time and liked the risk-reward scenario. This gave them an opportunity to enter the market in a meaningful way, with scale,” said Brackett in the interview.

The geographic footprint of Antares will likely remain much as it is today, with its headquarters in Chicago, a significant presence in New York, and operations near Atlanta. Antares Capital will operate as an independent business, and retain the name.

The sale is expected to close in the third quarter.

The Senior Secured Loan Program (SSLP), so far not part of the sale, will continue to operate for a time prior to the closing of the deal, giving “Ares and CPPIB the opportunity to work together on a go-forward basis.” The SSLP is a joint venture between GE Capital and Ares Capital. Without an agreement, the program may be wound down (see GE’s sale to CPPIB leaves fate uncertain for $9.6B SSLP partnership).

A similar strategy holds for the Middle Market Growth Program (MMGP), which is a joint venture between affiliates of GE Capital and affiliates of Lone Star Funds, GE said. That program accounts for $600 million of GE Capital investment.

GE announced in April it would divest GE Capital, including its $16 billion sponsor finance business and focus on its core industrial businesses. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more

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Murray debt slips after appeals court dismisses block of EPA rule

Murray Energy 11.25% second-lien notes due 2021 have traded down four points today on news that a federal court has dismissed an appeal by the coal credit and a dozen states to block a proposed Environmental Protection Agency rule that would limit carbon dioxide emissions from existing power plants. Block trades were reported this morning at 89, versus 90.5 late yesterday and 93 going out last week, trade data show.

In the loan market, Murray’s B-2 term loan due 2020 (L+650, 1% LIBOR floor) was quoted at 94/95 this morning, which compares with 95/95.75 at the beginning of the week, according to sources. The $1.7 billion loan was issued in April at 97 alongside the $1.3 billion bond deal, proceeds of which helped support a purchase of a stake in rival Foresight Energy.

Murray Energy, along with the states of West Virginia, Alabama, Indiana, Kansas, Kentucky, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, South Dakota and Wyoming, argued that the Clean Air Act does not authorize the EPA to limit such emissions, and it sought to enjoin the EPA from issuing a final rule on the matter, according to court documents. But the EPA has so far only published a proposed rule, and the appellate court ruled that it had no authority to issue a ruling on the legality of a proposed rule, saying it is only authorized to review “final agency rules.”

Proposed rules are published by the government for the purpose of, among other things, obtaining public comment prior to final issuance. According to the Court of Appeals decision, the EPA has received more than two million comments on the proposed rule, and intends to issue a final rule this summer.

Yesterday’s ruling, however, is likely not the final word on the matter. The Court of Appeals ruling does not address the merits of the argument made by Murray and the states with respect to the legality of the rule under the Clean Air Act, and the final rule will presumably be subject to further legal challenge.

Murray Energy placed the $1.3 billion issue of 11.25% second-lien notes in April at 96.86, to yield 12%, after multiple revisions to covenants, size, structure, and price talk. Bookrunners on the B-/B3 deal were Deutsche Bank and Goldman Sachs, and terms were eventually finalized at the midpoint of re-launch talk. Proceeds, along with a coordinated loan effort, support the planned acquisition of a stake in Foresight Energy.

Changes were also made to the concurrent loan (see “Murray Energy sets revised TLs; revises Foresight Energy purchase,” LCD News, April 7, 2015). – Staff reports

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

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Palmer Square, NYSE launch two new indices to benchmark CLOs

Palmer Square Capital Management has teamed up with the New York Stock Exchange (as calculation agent and distributor) to launch two new indices designed to benchmark the CLO markets.

The Palmer Square CLO Debt Index (NYSE: CLODI) and Palmer Square CLO Senior Debt Index (NYSE: CLOSE) are billed as the first broadly distributed daily benchmarks for U.S. dollar-denominated CLOs backed by broadly syndicated leveraged loans.

The Palmer Square CLO Debt Index is a rules-based observable pricing and total return index for CLO debt sold the United States, rated A, BBB or BB (or equivalent rating), i.e. mezzanine CLO debt.

By contrast, the Palmer Square CLO Senior Debt Index will track the ‘senior’, or AAA and AA (or equivalent rating) tranches.

Palmer Square’s investment team developed the proprietary methodology for calculating the indices. The NYSE serves as the calculation agent for the indices and will disseminate index values daily.

Palmer Square Capital Management, an independent asset manager and part of the Montage Investments family, provides investment advisory services and manages portfolios of corporate and structured credit, high yield municipal credit and various hedge fund strategies for a diverse set of clients across institutional investors, registered investment advisory firms, broker-dealers and high net worth individuals.

As of April 30, 2015, Palmer Square managed in excess of $3.7 billion in assets. The firm recently closed on its fourth CLO, a $435.8 million transaction via J.P. Morgan. – Sarah Husband

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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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Altice buys 70% of Suddenlink; new debt financing to be raised

Altice has announced that it will acquire 70% of Suddenlink from BC Partners, CPP Investment Board and Suddenlink management, with BC Partners and CPP Investment Board retaining a 30% stake. The purchase values Suddenlink at an enterprise value of $9.1 billion and 7.6x synergy-adjusted EBITDA. J.P. Morgan, PJT Partners and BNP Paribas acted as financial advisors to Altice.

The transaction is to be financed with $6.7 billion of new and existing debt at Suddenlink, a $500 million vendor loan note from BC Partners and CPP Investment Board, and $1.2 billion of cash from Altice. Market sources suggest that given the size of the debt raise, loan and bond issuance on both sides of the Atlantic is a distinct possibility.

The transaction is expected to close in the fourth quarter of 2015 once applicable regulatory approvals have been obtained.

Altice S.A. (holdco) bonds are underperforming on the news while Altice International bonds are largely stable. The 7.25% and 6.25% euro-denominated notes due 2022 and 2025 are both down a point, at 104.25 and 99.75, respectively, while the 7.7% dollar-denominated notes due 2022 are indicated down 75 bps, at 102.25.

This will be Altice’s third jumbo takeover in just over a year. Earlier this year it completed a roughly €6 billion cross-border loan-and-bond financing backing the purchase of the Portuguese assets of Portugal Telecom from Oi for a €7.4 billion enterprise value.

In April last year Numericable and Altice completed a $16.67 billion, seven-tranche, euro and U.S. dollar offering that shattered records to become the largest bond deal on record, along with $5.2 billion in Numericable loans. The offerings were part of a multi-pronged M&A-related recapitalization under which Numericable purchased telecom firm SFR from Vivendi.

Suddenlink is the 7th largest U.S. cable operator with 1.5 million residential and 90,000 business customers, primarily focused in Texas, West Virginia, Louisiana, Arkansas and Arizona. In 2014, Suddenlink generated revenue of $2.3 billion and EBITDA of more than $900 million. – Luke Millar

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Burger King reigns in HY bonds during busiest week in 6 months

Sixteen issuers waded into the high-yield bond market this week, for the busiest period by number of deals in six months. The largest deal was restaurant chain Burger King/Tim Hortons, which issued $1.25 billion of bonds to refinance other debt.

It was the busiest week since Nov. 17, 2014 by number of deals, though not the highest by volume. Volume for the week is expected at $8.915 billion, short of last week’s $9.475 billion.

US high yield bond volume May 2015

Besides Burger King/Tim Hortons, the largest deals of the week were electricity generator PPL Energy Supply, insurer CNO Financial Group, Black and Decker toolmaker Spectrum Brands, car loan provider Ally Financial, and Energizer Holdings. Most of them were for debt repayment.

Energizer was an exception. The company, which trades on the New York Stock Exchange under the ticker symbol ENR, sold $600 million of 10-year notes to fund a spinoff of its Household Products business, as announced in April 2014. The company manages business in two units: personal care, which includes shaving and infant care, and household products, which includes batteries and flashlights.

The new bonds this week are brought by Energizer SpinCo (New Energizer), the recently formed holding company for the Household Products business of Energizer Holdings, with proceeds being used by Energizer Holdings (ParentCo) to fund the tax-free spin-off of the business. As part of the deal, ParentCo will be renamed Edgewell Personal Care Company, and New Energizer will be renamed Energizer Holdings, Inc., according to filings.

By rating, the junk bonds issued this week were concentrated as single- and double-B rated issues. However, insurance broker NFP Corp. and HRG Group, the holding company previously known as Harbinger Group, priced lower-rated triple-C offerings. Notably, Spectrum Brands, the Wisconsin-based company whose products range from Rayovac batteries to Cutter-branded mosquito repellent, received an investment by HRG Group this week with proceeds from its $300 million, two-part offering.

Interestingly, issuers continue to have success placing longer-dated 10-year offerings, despite ongoing volatility in Treasury and equity markets, and growing investor caution toward longer-dated bonds.

The surge in high-yield issuance comes alongside a rush by higher-rated counterparts to sell bonds before underlying interest rates rise more. In the high-grade market, companies have been rushing to issue bonds as Treasury yields march higher. The yield on the 10-year Treasury is 2.14% today, after touching 2.35% on May 12, versus 1.90% on April 15.

This week, 10-year bonds were sold by CNO Financial Group, PPL Energy Supply, Spectrum Brands, Energizer Holdings, andFelcor Lodging, which is a publicly traded REIT whose properties include the Knickerbocker Hotel in New York.

Last week, 10-year bonds were sold by drug clinical trial provider Quintiles Transnational, aircraft component supplierTransDigm, and oil-and-gas producers Range Resources and SM Energy. The bookrunners on Quintiles marketed the 10-year tranche in terms of spread, not yield, investor sources say.

Demand was strong for the marquee high-yield bond offering this week, Burger King’s issue of secured notes due 2022. J.P. Morgan led the deal. Talk emerged in the 4.75% area, slightly inside of 4.75-5% whispers, and sources relay that the order book reached north of $4 billion. Proceeds, along with cash on hand, will be used to repay roughly $1.5 billion of bank debt. The bonds priced at par to yield 4.625%.

The issuer of the debt, Restaurant Brands International, trades on the New York Stock Exchange under the ticker QSR with an approximate market capitalization of $19.5 billion.

Restaurant Brands was created in December 2014 through the merger of Burger King Worldwide and Canadian coffee and breakfast chain Tim Hortons, with over 19,000 restaurants in 100 countries and U.S. territories. Warren Buffet’s Berkshire Hathaway acquired $3 billion of preferred shares in the transaction.

Burger King is no stranger to the junk bond market. In September 2014, Burger King issued $2.25 billion offering of second-lien secured notes yielding 6% to fund the acquisition of Tim Hortons.

The new Burger King bonds stayed in demand as they began trading in the secondary market. They were quoted steady today, at 100/100.5. Buying interest also remained for other new issues.

Ally Financial, whose ratings are both junk and low-tier investment grade, were also bid higher. The 3.6% notes due 2018 that were sold at 99.44, to yield 3.8%, gained from those levels to a 100 mid-point, sources said. Ally 4.625% notes due 2022 were sold at 98.39, to yield 4.9%, and traded as high as par earlier today, trade data showed. – Joy Ferguson/Matt Fuller

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JC Penney bonds gain on earnings, loan investors eye call protection

Bonds backing J.C. Penney advanced this morning, just as credit protection cheapened, after the retailer reported better-than-expected quarterly results. Shares dropped, however, with JCP trading on the NYSE roughly 7% lower, at $8.07 per.

The 8.125% notes due 2019 advanced two points, to 101/101.5, while the 5.65% notes due 2020 ticked up half of a point, to 87/88, according to sources. Long-tenor 7.4% bonds due 2027 changed hands in blocks at 83.5, which is up roughly two points from recent prints, trade data show.

Over in the CDS marketplace, five-year protection on the credit tightened roughly 19% this morning, to 4.8/5.7 points upfront, according to Markit. That’s approximately $125,000 cheaper upfront, with a mid-point $520,000 initial payment, in addition to the $500,000 annual expense, to protect $10 million in J.C. Penney bonds.

The company reported net sales of $2.86 billion during its fiscal first quarter ended May 2, up from $2.8 billion in the year-ago fiscal first quarter, according to a corporate filing. Results were in line with the S&P Capital IQ consensus estimate for sales; however, the adjusted EBITDA result of $82 million in the quarter was well ahead of the consensus estimate of $29 million.

Looking ahead, the company tightened its 2015 full-year guidance for a sales increase by 4-5%, from 3-5% previously, and put forth an estimate for $600 million in EBITDA, versus none prior, filings show.

Over in the loan market, J.C. Penney’s covenant-lite term loan due 2018 (L+500, 1% LIBOR floor) was little changed on the news, quoted at 99.875/100.25, according to sources. On yesterday’s conference call, CFO Edward Record noted that the 101 hard call protection rolls off the loan this month.

“It’s something we continue to look at,” Record said, according to a transcript of the call provided by S&P Capital IQ. “We know it is probably over-collateralized, and there may be some opportunity there. We also know that it doesn’t come due to 2018, so we don’t have a gun to our head to have to do anything any time soon. We’ll continue to monitor rates and see if there’s any opportunity to do something there.”

The loan, originally $2.25 billion, was placed in May 2013; it originally included 102, 101 call premiums. Goldman Sachs is administrative agent.

The Plano, Texas-based company is rated CCC+/Caa2, with positive and stable outlooks, respectively. – Matt Fuller/Kerry Kantin

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