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After Hiatus, Repricings Return to US Leveraged Loan Market

U.S. leveraged loan repricings, which flourished in the first half of 2018, then disappeared as the market supply/demand equation turned in favor of investors and as new-issue spreads widened, are back.

In the last week of September there were four repricings, and there were four more the first week in October (Fogo de ChaoEmployBridgeProQuest, and Red Ventures). Of course, this surge follows a repricing-free July and an August where repricings tallied just $3.6 billion. A still-light $8.9 billion of repricings were posted in all of September, according to LCD. Note that a spate of big-ticket LBOs kept syndication desks busy last month.

The absence of repricings in the summer is not surprising.

New-issue spreads have widened since the middle of the second quarter. The average new-issue TLB spread on borrowers rated B/B+ reached an intrayear high of L+386 in September, up 50 bps from the 2018 low in March. Likewise, borrowers rated BB/BB– saw spreads rise to roughly L+275, from just over L+200 in May. – Marina Lukatsky

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Sears Files Ch. 11 with $300M DIP Loan; Lampert Resigns as CEO

Sears Holdings Corp. has filed for Chapter 11 in bankruptcy court in Manhattan, the company announced.

In connection with the filing, Eddie Lampert resigned as the company’s CEO, effective immediately, to be replaced by an “Office of the CEO” to manage the company’s day-to-day operations that is composed of CFO Robert Riecker and retail executives Leena Munjal and Gregory Ladley. Lampert will continue, however, as chairman of the board. In addition, the company has appointed a chief restructuring officer, Mohsin Y. Meghji, who is a managing partner of M-III Partners.

The filing, which was announced in the early morning hours, was expected. Sears had a $134 million debt payment due today on its second-lien debt that it was widely expected to miss, determining the timing, and numerous published reports last week said that Sears had hired boutique advisory firm M-III Partners to help prepare the filing and that the company was seeking DIP financing.

The company said in a news release that it “expects to move through the restructuring process as expeditiously as possible and is committed to pursuing a plan of reorganization in the very near term as it continues negotiations with major stakeholders started prior to today’s announcement.”

In connection with the filing, the company said it had commitments for $300 million in senior priming DIP financing from its senior secured asset-based revolving lenders, and that it was negotiating a $300 million subordinated DIP with hedge fund ESL Investments, the company’s largest stockholder and creditor.

Lampert is ESL’s founder and CEO.

The senior DIP is composed of roughly $189 million in revolving ABL commitments, priced at L+450, with an undrawn commitment fee of 0.75%, and a $111 million term loan subject to a borrowing base formula at L+800, according to bankruptcy court filings. Bank of America is the agent.

The company told vendors that with the DIP funding it would be able to pay them in the ordinary course of business for goods and services provided after today. Pre-petition amounts owed, however, would be repaid in the context of a reorganization plan, although some vendors would receive preferred treatment under the company’s “critical vendor motion.”

According to the court filing, some 200 vendors had stopped shipping merchandise to the company in the past two weeks.

The contemplated junior DIP, meanwhile, would be in an initial amount of $200 million, which could be upsized to $300 million at the discretion of the agent bank (which is to be determined, but will be named by ESL), and would bear interest at L+950. Cyrus Capital would also be a lender under the junior DIP, court filings show (note, however, that while it is included in the company’s DIP approval motion, the junior DIP will not be considered by the court until a second interim hearing, and could be replaced by an alternative financing transaction).

The company said in court filings that it only had a short period of time in which to negotiate the DIP because it first approached lenders only 10 days ago. The company explained that it was hesitant to approach potential lenders too far in advance because of concerns that media focus on the company would cause such inquiries to be become a self-fulfilling prophecy, adding, “In hindsight, those concerns about adverse publicity were well-founded, as discussions regarding debtor in possession financing become the subject to media reports and speculation.”

In any event, the company said its Sears and Kmart stores, along with its online and mobile platforms, are open and continue to offer a full range of products and services to members and customers.

This is significant, as news reports last week said that some of the company’s lenders were pushing for a liquidation of the company.

The company said in a news release that it intends to reorganize around a smaller store platform of EBITDA-positive stores, adding that it is currently in discussions with ESL regarding a stalking-horse bid for the purchase of a large portion of the company’s store base.

The company also said it plans to close 142 unprofitable stores near the end of the year, and that liquidation sales at these locations “are expected to begin shortly.”  The company noted these closings would be in addition to the 46 store closings that the company previously announced.

In court filings, the company said it would reorganize as a “member-centric” business.

More specifically, in terms of a reorganization path, Riecker explained in his first day declaration filed with the bankruptcy court that about 400 of the company’s stores are “four-wall EBITDA positive (before any lease concessions),” and that the company intends to sell “these and other viable stores, or a substantial portion thereof,” as a going concern pursuant to Section 363 of the Bankruptcy Code. These are the stores about which the company is in negotiations with ESL, Riecker said, adding that if a transaction were successful, the result would be “a right-sized version of the company” that not only would save the Sears and Kmart brands, but “the jobs of tens of thousands of employees.”

Additionally, Riecker said the company would market and sell certain non-core assets, such as intellectual property and specialty businesses, to help finance the Chapter 11 cases and maximize value. Riecker said the company has “moved those discussions [excluding the store closures already announced] within the confines of the Chapter 11 cases to provide all of the company’s stakeholders, as well as the court, with the opportunity to evaluate the wisdom of those transactions.”

The liquidations of the initial round of 142 store closures would net the company $42 million, Rieger said.

According to Riecker’s declaration, the company has “certain tax attributes,” including a tax basis in certain assets exceeding the value of those assets, in excess of $5 billion in net operating loss carryforwards, and tax credits of roughly $900 million, although it is unclear at this point exactly how these tax attributes would figure into any going concern sale.

The company said it formed a special committee to oversee the restructuring process that would “have decision making authority with respect to transactions involving affiliated parties.” The special committee is composed solely of independent directors, specifically, Alan Carr, Paul DePodesta, Ann N. Reese, and William Transier.

The company named Carr, a well-known advisor and attorney in the restructuring industry, to the board last week, setting off the intense media speculation about the company’s coming Chapter 11 filing. Similarly, the company noted that Transier “has extensive restructuring experience involving companies with complex capital structures and has served on special committees of independent directors responsible for overseeing restructuring processes.”

In terms of milestones, the company’s DIP provides that the company must file a reorganization plan and disclosure statement by Feb. 18, 2019, that the company obtain approval of its disclosure statement by March 25, 2019, that the company obtain confirmation of the reorganization plan by April 29, 2019, and that the plan become effective by May 14, 2019.

While these milestone deadlines should be treated with a large grain of salt at this point in the proceedings, given the reported desire of some lenders to see the company liquidated and the failure of the company’s prior restructuring initiatives to gain traction, it is worth noting that Riecker warns that “time is of the essence in these Chapter 11 cases.”

The company currently “burns a significant amount of cash—approximately $125 million per month—in the course of operating [its] business,” Riecker said, explaining that this burn rate “is due, at least in part, to the discrepancy between the company’s operational capacity, which can support a business of the company’s previous size, and the company’s current, reduced footprint that has resulted from its ongoing store closure initiative.”

Rieger said the company hopes “that this imbalance will be corrected through the purchase of the company’s viable stores, but in the meantime, these Chapter 11 cases must progress with all due speed to stem these substantial operating losses that will continue to decrease the value of the debtors’ estates.” — Alan Zimmerman

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US LBOs Size Grows to Post-Crisis Highs Thanks to Run of Jumbo Deals

Thanks to a spate of big-ticket deals in September, leveraged buyouts in the U.S. are larger now than at any time since the financial crisis.

During the third quarter the average size of an LBO transaction hit $1.8 billion, according to LCD. That’s up from $1.375 billion during the same period a year ago and is near the record $2 billion average in 2007, at the height of the last credit cycle.

Boosting the 3Q18 numbers are some jumbo LBOs, two of which entail large cross-border leveraged loan components. Chief here is the $17 billion majority buyout of Thomson Reuters’s Financial & Risk unit, now called Refinitiv (link, plus a list of the largest leveraged financings of all time). As well, Carlyle and GIC recently closed financing on their $11.7 billion LBO of Akzo Nobel Specialty Chemicals.

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Struggling Sears Names Distressed Advisory Expert Carr as Independent Director

Sears Holdings Corp.‘s board yesterday named Alan Carr as an independent director. Carr is managing member and CEO of Drivetrain, a distressed and restructuring advisory firm.

Carr is set to hold the position until the issuer’s 2019 annual shareholder meeting or until a successor is elected and qualified, according to a company filing.

Soon-to-mature bonds of Sears were thinly traded on news of Carr’s appointment, with the issuer’s roughly $134 million of 6.75% second-lien notes due Oct. 15 changing hands on either side of 87.5, roughly in-line with levels week-over-week.

In addition to the above-mentioned notes, Sears has $668 million of other debt maturing in the next twelve months, according to regulatory filings.

The move comes two weeks after Sears CEO Eddie Lampert’s hedge fund ESL Investments outlined a multi-pronged proposal for the distressed retailer to avoid bankruptcy, according to an amended filing with the SEC. Lambert’s Sept. 23 plan calls for the restructuring of around $1.1 billion of the company’s debt via a distressed exchange that would reduce its $5.6 billion debt burden to approximately $1.24 billion, assuming all sale proceeds are used to pay down debt, according to the filing.

Lambert’s proposal also urges the company to sell $1.5 billion of real estate as well as divest some $1.75 billion of assets, including Sears Home Services and the Kenmore appliance brand, the proceeds of which would be used to pay down debt.

As reported, Lampert earlier this year urged the ailing retailer to sell its prize assets, writing in a letter that ESL is willing to acquire the Sears Home Services division and PartsDirect business. ESL has also offered $400 million to acquire the Kenmore brand.

In terms of the previously mentioned distressed exchange, ESL has proposed that eligible holders of the ESL second-lien PIK loan due 2020 and 2019 would be offered the option to exchange their holdings for mandatorily convertible secured debt or else extend maturities with a reduced conversion price. Unsecured holders are offered the choice to swap into mandatorily convertible unsecured debt or a cash option. The aforementioned 6.75% second-lien notes due October 2018 are excluded from the proposal.

Hoffman Estates, Ill.–based Sears Holdings operates in two segments, Kmart and Sears Domestic. Sears Roebuck Acceptance Corp. operates as a subsidiary of Sears, Roebuck and Co., which itself is a subsidiary of Sears Holdings. Ratings are CCC–/Ca on Sears Holdings and CCC–/C on Sears Roebuck Acceptance Corp. — James Passeri/Rachelle Kakouris

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Free Webinar from S&P: M&A Outlook, with Focus on Debt, Private Equity

S&P Global Market Intelligence is pleased to present a free webinar detailing today’s M&A market, including how current and potential obstacles might affect the leveraged finance world:

M&A Overview, with Focused Insight on the Debt and Private Equity Markets 

  • Date: Thursday, October 11, 2018
  • Time: 11:00 am – 12:00 pm Eastern time
  • Duration: 1 hour

You can register for the webinar here (link).

Included in the webinar: Transaction activity has always been impacted by numerous outside factors. Recent complications include Brexit, trade wars, and tariffs. With numerous potential influences, what is the current state of the market, based on these latest trends?

Join S&P Global Market Intelligence for a complimentary webinar, where industry experts share their insights while focusing on the M&A, Debt, and Private Equity transactional markets.

  • Analyzing recent global M&A volumes and factors driving activity. What is the outlook of M&A deals for the US?
  • Debt markets and LBO activity: What is the current state of the market?
  • Deep dive into private equity including buy and sell-side conditions and strategies

Moderator
Lawrence Choy
Associate Director – Corporates Segment
S&P Global Market Intelligence

 

Panelists
Nathan Stovall
Senior Research Analyst – FIG Research
S&P Global Market Intelligence

 

Ruth Yang
Managing Director – Leveraged Commentary & Data
S&P Global Market Intelligence

 

Justin Abelow
Managing Director – Houlihan Lokey
Financial Sponsors Group

Webinar viewers can, while registering, submit questions to be answered by the panelists.

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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European Leveraged Loan Returns Hit 16-Month High

The European secondary loan market recorded the best performance for more than a year in September, propelled by strong investor demand for loans.

Consequently, the S&P European Leveraged Loan Index (ELLI) gained 0.56% in September, a 16-month high, rounding out an already strong quarter for loans. Indeed, the ELLI returned 0.37% in July and 0.51% in August, following a monthly average of only 15 bps during the first half of 2018. As a result, the quarterly gain of 1.44% was a two-year high — edging out 2Q17’s  return of 1.43%, and up from a rather flat second quarter, which gained just 0.16%. Despite the strong third quarter, the year-to-date return continued to lag 2017, running at 2.35%, versus 3.49% in the first nine months of 2017. – Staff reports

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LBOs Dominate Leveraged Loan Issuance in 3Q18

loan issuance by purpose

While leveraged loan issuance in the U.S. slowed in 2018’s third quarter, LBO activity surged, thanks to huge credits backing Refinitiv, Akzo Nobel, and Envision Healthcare.

These three deals comprise nearly 40% of all LBO loan activity over the past three months. The remaining $30 billion is not exactly small potatoes. In total, LBO activity in the third quarter hit $48.3 billion, a record, according to LCD. – Staff reports

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Leveraged Loan Default Rate Dips Again After Third Straight Blemish-Free Month

leveraged loan defaults

For a third consecutive month there were no new defaults among constituents of the S&P/LSTA Leveraged Loan Index. Consequently, the default rate fell to a 10-month low of 1.81% in September, from 1.99% in August.

Though the rate has declined significantly from the three-year high of 2.42% at the end of March, it remains well inside the 3% historical average where, as detailed below in LCD’s quarterly default survey of loan portfolio managers, it is expected to stay for a couple more years.

By issuer count, the default rate fell to 1.59%, down from 1.71% at the end of August.

This marks the first three-month default-free streak in the Index since August 2014, though some potential situations loom.

The well-flagged 30-day grace period on American Tire’s missed Sept. 1 interest payment, for one, is set to expire at the end of September. Tweddle Group, meanwhile, is said to be negotiating a deal to equitize its term loans.

Other Index issuers whose debt is trading in technical distress include American Commercial LinesCaelus EnergyCatalina MarketingEmpire Generating Co.Longview PowerDavid’s BridalFullBeauty BrandsCrossMarkPetcoPhillips Pet Food & SuppliesCTI FoodsDixie ElectricAcademy LtdAcosta, and Revlon, among others. – Staff reports

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S&P Global Ratings Publishes Comprehensive CLO Primer

S&P Global Ratings recently published a comprehensive primer to provide a high-level overview of the collateralized loan obligation (CLO) market.

The Primer begins with “What is a CLO?” and covers topics such as:

  • The typical structure of a CLO
  • What is a broadly syndicated loan?
  • How is the portfolio of a CLO composed and how do the different tests work?
  • The typical CLO lifecyle
  • An overview of how S&P Global Ratings analyzes each CLO

You can view the CLO Primer here.

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Amid Investor Demand, Envision Accelerates Response Date on $5B Leveraged Loan

Leveraged loan investors considering the $5.05 billion first-lien term loan backing KKR’s buyout of Envision Healthcare have until tomorrow to commit to the deal, as opposed to the original deadline of Oct. 1, according to sources.

No further changes on the Credit Suisse-led deal were announced.

Price talk for the seven-year covenant-lite TLB is L+400, with a 0% LIBOR floor and an OID of 99–99.5. That works out to a yield to maturity of about 6.59–6.68%. Lenders are offered six months of 101 soft call protection.

The full arranger group includes Citi, Morgan Stanley, Barclays, Goldman Sachs, Jefferies, UBS, RBC Capital Markets, Societe Generale, HSBC, Mizuho, BMO Capital Markets, SunTrust Robinson Humphrey, Credit Agricole, and KKR Capital Markets.

Agencies have assigned ratings of B+/B1 to the first-lien facility, which includes a $300 million revolver due 2023, with a 3 recovery rating from S&P Global Ratings. A $550 million ABL facility is rated BB/Ba1, with a 1 recovery rating. Corporate ratings are B+/B2, with negative and stable outlooks, respectively.

Additional financing for the buyout will come from a $1.625 billion offering of eight-year (non-call three) unsecured notes.

KKR announced in June that it was taking Envision private for $46 per share in a deal valued at roughly $9.9 billion, including debt. Envision (NYSE:EVHC) is a provider of physician-led services and post-acute care, and ambulatory-surgery services. — Jon Hemingway

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