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Buyers of Patriot Coal assets clear one hurdle, reach deal with union

The United Mine Workers of America (UMWA) has reached “prospective collective bargaining agreements in principal” with both Blackhawk Mining and the Virginia Conservation Legacy Fund (VCLF), the expected purchasers of the assets of Patriot Coal, the union announced yesterday.

As reported, Patriot’s proposed assets sales to Blackhawk and VCLF, which lie at the heart of the company’s reorganization plan, are both conditioned on Patriot either agreeing with the union on new labor accords, or successfully rejecting the existing labor and pension contracts and unilaterally imposing new work conditions.

As also reported, the company had already filed a motion seeking court approval of its rejection of its labor and pension agreements. A hearing began on Sept. 1, but the bankruptcy court judge overseeing the case in Richmond, Va., delayed the hearing for two days, sending the parties back to the negotiating table.

The union did not release any details of the new pact.

In a statement, UMWA president Cecil Roberts said, “There is still more work to do on the actual language of these prospective agreements, and there are several more legal hurdles that must be resolved in bankruptcy court before we would be able to take these prospective agreements to our membership for ratification. Should we clear those hurdles and move forward with ratification, no details of these prospective agreements will be publicly released prior to our members’ ratification vote.”

Roberts added, “Because there are still details to be worked out and the legal process needs to be finished, it is not yet clear when that vote will be.”

It is unclear whether the new deal also resolves outstanding issues with respect to the company’s pension obligations, or whether litigation aimed at the company’s rejection of those obligations will have to continue. – Alan Zimmerman

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B&G Foods to seek $500M term loan, tap revolver for Green Giant, Le Sueur buy

B&G Foods disclosed that it will seek to add a new roughly $500 million incremental term loan to its existing pro rata credit facility in connection with its planned acquisition of Green Giant and Le Sueur brands from General Mills for roughly $765 million in cash. B&G Foods also disclosed that it intends to tap its undrawn $500 million revolver.

As reported, B&G Foods completed an $800 million pro rata loan package in the summer of 2014 to refinance a previous pro rata loan deal. The 2014 deal included a $300 million A term loan and the $500 million revolver. Pricing is tied to a leverage-based grid of L+150-200.

Credit Suisse, Barclays, RBC, Bank of America Merrill Lynch, Deutsche Bank, TD, RBS Citizens, and Rabobank arranged that transaction.

As of July 4, there was $285 million outstanding under the A term loan due 2019.

The existing facility includes a leverage test of 7x through 2015, stepping to 6.75x in 2016 and 6.5x thereafter. It also includes an interest-coverage test of 1.75x.

The Green Giant and Le Sueur acquisition is expected to close in the fourth quarter. Following a 12-month transition period, Green Giant is expected to generate annualized net sales of roughly $550 million and annualized adjusted EBITDA of roughly $95-100 million.

Parsippany, N.J.-based B&G Foods is rated BB-/Ba3. – Richard Kellerhals

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Lannett nets $1.285B commitment for Kremers Urban acquisition

Lannett Company disclosed that it has entered into a commitment letter with Morgan Stanley and RBC providing a $1.285 billion credit facility in connection with the generic-pharmaceutical company’s planned $1.23 billion acquisition of Kremers Urban Pharmaceuticals.

Under the terms of the commitment letter, the credit facility includes a $1.16 billion term loan and a $125 million revolver.

The acquisition is expected to close in the fourth quarter.

Philadelphia-based Lannett expects pro forma leverage to be roughly 3-3.25x, according to an investor presentation. – Richard Kellerhals

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Loan bids recoup some losses in week-over-week observation

The average bid of LCD’s flow-name composite advanced 18 bps over the past week, to 98.33% of par, from 98.15 on Aug. 26. (Due to light secondary activity, LCD is reading the flow-name composite once a week, on Wednesdays. We will resume the regular Tuesday/Thursday schedule after Labor Day.)

Among the 15 names in the sample, 10 advanced, one declined, and four were unchanged from the previous reading. Posting the largest moves in either direction were the Charter Communications F term loan due 2021, the PetSmart term loan due 2022, and the Restaurant Brands (Burger King) term loan due 2021, each of which was bid a half-point higher in the previous reading. Note that today’s positive reading snaps a streak of six consecutive declines in the average bid price.

The market has continued to recoup some of the losses posted early last week on concerns about China. Activity has been thin during what is typically a quiet time of the year, but as noted previously, loans have outperformed equities and high-yield last month, and so far in September have been stable despite this week’s swings in stocks.

Looking ahead, players say that although the loan markets and the capital markets overall clawed back lost ground in late August, the watch words for September are “price discovery.” For one thing, all the issues that caused the markets to correct in August – full valuations in the equity markets, China’s currency devaluation and economic slowdown, woes in the emerging markets, tepid economic growth in the U.S., weak oil prices, uncertainty over whether the Fed will begin raising the funds rate – remain in effect. Therefore, arrangers say August’s secondary market decline has left the new-issue market in price discovery mode. Players say it’s tough to gauge where clearing yields will settle once the new-issue market reopens post-Labor Day, which, after all, will be after a new-issue hiatus of several weeks.

With the average loan bid rising 18 bps, the average spread to maturity dropped four bps, to L+427.

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

  • 99.5/L+369 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+367.
  • 96.58/L+529 for the six loans rated B or lower by one of the agencies; STM in this category is L+501.

Loans vs. bonds 
The average bid of LCD’s flow-name high-yield bonds added 82 bps, to 97.60% of par, yielding 7.40%, from 96.78 on Aug 26. The gap between the bond yield and discounted loan yield to maturity stands at 315 bps. – Staff reports

To-date numbers

  • September: The average flow-name loan increased 18 bps from the final August reading of 98.15.
  • Year to date: The average flow-name loan advanced 141 bps from the final 2014 reading of 96.92.

Loan data

  • Bids gain: The average bid of the 15 flow names rose 18 bps, to 98.33% of par.
  • Bid/ask spreads tighten: The average bid/ask spread shrank four basis points, to 34 bps.
  • Spreads drop: The average spread to maturity – based on axe levels and stated amortization schedules – edged down four basis points, to L+427.
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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

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Loan default rates climb in August amid weakness in Energy sector

After a two-month absence, default activity resumed in August, when two energy names – Samson Resources and Alpha Natural Resources – defaulted on $1.6 billion of S&P/LSTA Index loans. As a result, the lagging-12-month default rate climbed to a five-month high of 1.30% by amount, from July’s 33-month low of 1.11%, and to 0.78% by number of issuers, from a 7.5-year low of 0.57%.

Loan index defaults Aug 2015

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U.S. speculative-grade corporate default rate hits two-year high

The U.S. trailing-12-month speculative-grade corporate default rate increased to 2.4% in August, reflecting seven defaults during the month, according to estimates by Standard & Poor’s global fixed income research. The latest reading represents the highest level for the default rate in the past two years.

Alpha Natural Resources Inc., ASG Consolidated LLC, SandRidge Energy Inc., Samson Resources Corp., Wilton Holdings Inc.,SAExploration Holdings Inc., and Halcon Resources Corp. each defaulted in August.

The rating agency expects the U.S. trailing-12-month speculative-grade corporate default rate to rise to 2.9% by June 30, 2016.

At the same time, the Standard & Poor’s U.S. distress ratio rose to 15.5% in August, its highest level in more than four years, as plunging oil prices caused spreads of Oil & Gas issues to widen considerably (see “Oil & Gas issues push S&P U.S. distress ratio to 4-year high,” LCD News, Aug. 27, 2015.)

According to S&P, the U.S. investment-grade spread expanded to 211 bps as of Aug. 31, from 196 bps as of July 31, while the speculative-grade spread widened considerably to 643 bps, from 607 bps. – Rachelle Kakouris

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LCD’s estimate of loan fund flows (8/27): -$111M Lipper/-$156M total

On Thursday, Aug. 27, outflows from loan mutual funds totaled an estimated $111 million based on the Lipper FMI universe of weekly reporters, or $156 million based on the total universe of open-ended funds plus ETFs, versus outflows of $113 million/$143 million on Wednesday, Aug. 26.

For the five business days ended Aug. 27, outflows totaled $933 million (Lipper FMI universe) and $1.21 billion (total universe plus ETFs), versus outflows of $783 million/$979 million during the five business days ended Aug. 20.

Methodology:

LCD compiles these data with the cooperation of a number of mutual-fund complexes. LCD is collecting daily fund-flow data for a representative sample of loan funds. We then take the weighted average AUM change each day from contributors and extrapolate it to:

  • the Lipper FMI AUM universe of $83.9 billion (as of Aug. 26) to provide a “Lipper-style” daily reading of inflows/outflows, and
  • the entire open-ended loan universe of $117 billion to give a fuller view of estimated inflows/outflows.