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Tiny BDC, pursued by activist, announces plan to liquidate

Crossroads Capital, a tiny BDC once targeting pre-IPO equity, announced this week it would liquidate its investment portfolio and distribute cash to shareholders.

This news comes after activist Bulldog Investors became the largest shareholder of the company, previously called BDCA Venture. BDCA Venture changed its name from Keating Capital in July 2014.

Crossroads Capital’s investments are in preferred stock, common stock, subordinated convertible bridge notes, subordinated secured notes, and equity warrants, although under previous management the company made an eleventh-hour attempt to switch to a debt strategy.

However, as of Jan. 25, the company’s investment strategy became “preservation of capital and maximization of shareholder value,” and will immediately pursue a sale of investments.

The plan to liquidate “was made after considerable analysis, review and deliberation. Both management and the board believe this is the most efficient way to deliver the company’s underlying value to our shareholders,” a Jan. 25 statement said.

Among the investments in the portfolio as of Sept. 30 are social media content company Mode Media, ecommerce network Deem, online dating company Zoosk, software company Centrify, renewable oils company Agilyx, human resources software company SilkRoad, waste management company Harvest Power, and solar thermal energy company BrightSource Energy.

Net assets totaled $54.5 million as of Sept. 30, 2015, or $5.63 per share, consisting of 12 portfolio company investments with a fair value of $39 million and cash and cash equivalents of $16.2 million. Shares in Crossroads Capital, which trade on Nasdaq as XRDC, closed at $2.10 yesterday.

In September 2014, the company’s previous board approved a change in strategy to focus on debt of private companies, moving away from venture equity. The change was part of then-management’s attempt to reduce the company’s stock discount to NAV.

But this plan was too little, too late, for some.

In May, Bulldog Investors filed a proxy statement soliciting support for a plan to elect its own board members, terminate an external management agreement with BDCA Adviser, and pursue a plan to maximize shareholder value through liquidation, a sale, or a merger.

Bulldog Investors criticized the strategy to convert BDCA Venture away from venture capital–backed or high-growth companies into an income-oriented fund, saying the BDC’s small size and high expense ratio meant the plan was “almost certainly doomed to fail.”

BDCV’s shares were trading at $5.05 at the time the proxy was filed in May 2015, a 25% discount from its March 31 NAV of $6.71. That compared to a listing price of $10 at the time of the company’s IPO on Nasdaq in December 2011.

In contrast, BDCV’s expenses in the three years prior to the proxy totaled $13.25 million, or $1.33 per share, according to the Bulldog proxy.

The plan laid out in May 2015 has more or less come to pass.

In July, shareholders elected Bulldog-nominated directors Richard Cohen, Andrew Dakos, and Gerald Hellerman. A proposal to terminate the investment advisory agreement with BDCA Venture Adviser failed to pass in a vote at the 2015 annual meeting, but was approved by the board in October.

CEO Timothy Keating resigned in late July, replaced by COO Frederic Schweiger. Around that time, the company held equity investments in 12 portfolio companies, 11 of which were private portfolio companies and the other which was publicly traded Tremor Video. The company did not expect any of the private companies to complete an IPO in 2015.

Schweiger resigned as CEO in December, and was replaced by Ben Harris. Harris is a director of NYSE-listed Special Opportunities Fund.

At the same time, BDCA Venture announced a name change to Crossroads Capital. The ticker changed to XRDC on Nasdaq, from BDCV. — Abby Latour

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

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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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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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Activision Blizzard seeks $2.3B TLA for King Digital buy

Activision Blizzard is seeking a $2.3 billion senior secured A term loan in connection with its $5.9 billion purchase of King Digital Entertainment.

Moody’s this morning assigned a Baa2 rating to the TLA. S&P Ratings Services earlier this month assigned a BBB issue-level rating and a 1 recovery rating to the proposed term loan.

As reported, Activision Blizzard obtained loan commitments from Bank of America Merrill Lynch and Goldman Sachs earlier this month. The original commitment, though, was outlined as a B-2 tranche maturing in 7.5 years, with pricing at L+300, with a 0.75% LIBOR floor and six months of 101 soft call protection.

Activision Blizzard then approached existing lenders for an amendment to seek the A term loan. As of Sept. 30, there was $1.9 billion outstanding under the company’s existing B term loan due Oct. 2020 (L+250, 0.75% LIBOR floor).

Under the terms of the acquisition, Activision Blizzard is paying $18 a share and plans to fund the deal with $3.6 billion of offshore cash on hand. The purchase price implies a multiple of 6.4x King’s estimated 2015 adjusted EBITDA.

Activision Blizzard generated trailing 12-month non-GAAP revenue of $4.7 billion, with King at $2.1 billion. Trailing 12-month adjusted EBITDA was $1.6 billion for Activision Blizzard and $900 million for King. — Richard Kellerhals/Chris Donnelly

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T-Mobile USA Launches $1B Term Loan Backing GCP

An arranger group led by Deutsche Bank this afternoon launched a $1 billion B term loan for T-Mobile USA, Inc., setting price talk of L+300, with a 0.75% LIBOR floor, offered at 99.5, sources said. Lenders to the seven-year covenant-lite loan are offered six months of 101 soft call protection.

At current talk, the loan would yield roughly 3.89% to maturity.

The wireless-communications provider will use the proceeds for general corporate purposes, which may include the acquisition of additional spectrum, sources said. The Federal Communications Commission is planning to auction off spectrum early next year in the 600 MHz band, sources noted. The auction is expected to kick off by the end of first quarter of 2016.

In addition to Deutsche Bank, bookrunners include Barclays, Citigroup, Goldman Sachs, and J.P. Morgan. Co-managers are Credit Suisse, Morgan Stanley, and RBC Capital Markets.

Commitments to the loan are due on Thursday, Nov. 5, at noon EST.

T-Mobile USA is rated BB/Ba3. The loan drew BBB-/Baa3 ratings, with a 1 recovery rating from S&P.

Secured leverage will be in the 0.1–0.2x range, sources said.

The Bellevue, Wash-based wireless concern is expected to hold a conference call tomorrow at 10 a.m. EDT to discuss its third-quarter results. — Chris Donnelly

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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 HighYieldBond.com, LCD’s free website promoting the asset class. HighYieldBond.com 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.

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Fifth Street-backed platform seeks to update middle-market lending

Len Tannenbaum, the founder of Fifth Street Asset Management, is seeking to modernize middle-market lending with a new platform where arrangers of these loans intersect with investors.

“The process for middle-market loan syndications remains inefficient and cumbersome and has not changed in any meaningful way over the last few decades,” said Tannenbaum, who is also CEO of Fifth Street Asset Management.

“It involves a tight club of 50 to 100 lenders that spend an enormous amount of time scheduling calls with each other, scribbling on notepads and sending forms back and forth via fax.”

Thus, Tannenbaum is launching MMKT, which will tackle the inefficiencies of syndication to middle-market companies. A full launch of the system is slated for the first quarter of 2016.

In recent years, lenders to middle-market companies have multiplied as banks curtail lending to these borrowers in the face of stricter regulation.

MMKT’s end-to-end platform was built using advanced encryption technology. Open to qualified institutional buyers only, potential investors will be able to browse loan listings, analyze private company information, register loan commitments, purchase loans, and take assignment of loans. Lenders can also list holdings through the platform and sell loan investments.

Loan originators will be able to submit loan details, enter diligence data, and sell loans to selected private or public groups. Financial sponsors and borrowers will be able to manage the loan buying process, and carry out post-closing and agency tasks.

Technology for the project was spearheaded by Len’s brother, David, who was chief technology officer of LiftDNA, a supply side platform, before it was acquired by digital advertising company OpenX in February 2012. David Tannenbaum is president of MMKT. Len Tannenbaum is interim CEO of MMKT.

The MMKT platform offers greater functionality than existing products geared to the loan market, and is more specifically tailored to the middle market lending process, Tannenbaum said. Eventually, MMKT will expand to secondary middle market loan trading.

“A big problem today in the loan market is that many loans are not based on actual bids and offers; they are based on indicative quotes that may not be updated. These indicative quotes are not real,” Tannenbaum said.

“We believe every market started off as closed, non-transparent markets. As part of their evolution, many have opened up. As we move towards a more liquid and transparent middle market lending industry, some may not be able to take advantage of inefficiencies anymore. Those not marking their books appropriately may not like this offering.”

So far, Fifth Street has closed syndication of a Fifth Street one-stop financing via the platform. MMKT is not accepting non-Fifth Street loan listings at this time, until the technology and user process is ready. Eventually, it will be open to other loan originators, who Tannenbaum believes will similarly benefit from using the MMKT platform, saving time and resources.

Smaller lenders, too, will reap benefits from the platform by syndicating their deals in MMKT and by gaining access to deals syndicated by other lenders. MMKT’s technology will likewise work for the co-investment process.

Fifth Street defines middle market as companies generating EBITDA of $10-100 million. MMKT is set up to syndicate deals of any size, but is optimized for syndicating deals that fall within Fifth Street’s traditional definition of middle market.

MMKT is expected to syndicate several large transactions over the next few months. Tannenbaum estimates the size of the market could be $100 billion per year.

“The technology and solution is applicable to many other liquid markets as well,” he said.

Fifth Street Asset Management is an asset-management company that advises two Fifth Street BDCs. Fifth Street Floating Rate Corp. trades on the Nasdaq as FSFR and provides sponsor-backed midsize companies with senior secured loans. Fifth Street Finance Corp. trades on Nasdaq as FSC and focuses on lending to sponsor-backed small and midsize companies. – Abby Latour

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

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GTT Communications eyes $450M loans for One Source Networks buy

GTT Communications disclosed that it has engaged KeyBank and SunTrust Robinson to provide a $400 million B term loan and $50 million revolver in connection with the acquisition of One Source Networks. The syndication process for this new debt will begin immediately, the company noted.

Proceeds will also be used to replace GTT’s current credit facility.

At closing, GTT expects its ratio of total debt to annualized adjusted EBITDA to be roughly 4x on a pro forma basis.

Under the terms of the acquisition, GTT will pay $175 million for One Source Networks, a provider of data and internet services. The deal is expected to close in late October.

For reference, in April, GTT boosted its pro rata credit facility by $130 million, extended the maturity to March 2020, from August 2019, and modified a leverage covenant via an amendment. The size of the A term loan was increased by $120 million, to $230 million, while the size of the revolver increased by $10 million, to $25 million. Pricing on the facility is tied to a leverage-based grid, at L+275-350.

GTT Communications, headquartered in McLean, Va., provides cloud networking services to enterprise, government, and wholesale customers. The company’s shares trade on the NYSE under the ticker GTT. –Richard Kellerhals/Jon Hemingway

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Gray eyes senior secured debt for purchase of Schurz assets

Gray Television plans to issue $415 million of debt to back its planned $442.5 million purchase of Schurz Communications T.V. and radio assets, according to an investor presentation filed with the SEC this morning.

On a conference call this morning to discuss the transaction, management said its “current intention” is to finance the deal on a senior secured basis, pointing to the low coupon on the existing term loan, which is L+300, with a 0.75% LIBOR floor.

The covenant-lite term loan due June 2021, which currently totals about $556 million, is steady on the news, quoted at 100/100.375. Wells Fargo is administrative agent, and also acted as a financial advisor to Gray on the Schurz transaction.

The broadcaster’s shares, which trade on the New York Stock Exchange under the ticker GTN, advanced about 10% on the news, to $12.90.

The M&A transaction, announced after the bell yesterday, is subject to regulatory approval and is expected to close in the fourth quarter of 2015 or the first quarter of 2016.

Pro forma for the transaction, 2014 revenue would have been roughly $774 million, 2014 net political revenue would have been about $120 million and 2014 broadcast cash flow would have been about $348 million. Net leverage, on a trailing eight-quarter basis, would run about 5.5x total at closing, according to the company. Note the existing capital structure also includes a $675 million issue of 7.5% notes due 2020.

Gray last tapped the market about a year ago via Wells Fargo for a $100 million fungible add-on term loan, which was issued at 99. Proceeds helped finance the company’s purchase of two ABC-affiliated television stations.

Gray is rated B+/B2, while the existing term debt is rated BB/Ba3, with a 1 recovery rating. S&P this morning said the company’s ratings are not affected by the acquisition announcement; Moody’s has not yet weighed in on the proposed M&A transaction. – Kerry Kantin 

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LRW nets $75M TL, RC for buyout by Tailwind Capital

Bank of Ireland and MidCap Financial were arrangers on $75 million of buyout financing backing an acquisition of LRW (Lieberman Research Worldwide) by Tailwind Capital, sources said.

The financing comprised a $60 million, six-year term loan, and a $15 million, five-year revolver. Ally Financial was also a lender.

Besides the acquisition, the proceeds will fund targeted acquisition to strengthen the company’s global footprint, a company statement said.

LRW, based in Los Angeles, provides data-driven consulting services and market research to management teams. – Abby Latour

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