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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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Judge approves $145M bankruptcy loan for Boomerang Tube, victim of oil-price downturn

The bankruptcy court overseeing the Chapter 11 proceedings of Boomerang Tube gave interim approval to the company’s proposed $145 million DIP facility.

The DIP comprises a $60 million term loan facility and an $85 million revolver. Court documents show that interest under the term portion would be at L+1,100, while interest under the revolver would be at L+450.

The interim approvals give the company access to $40 million of the term loan, consisting of $35 million of immediate borrowing capacity, and an additional $5 million thereafter upon certain circumstances. The company would have access to the entire revolver, subject, of course, to the facility’s borrowing base restrictions.

A final hearing on the DIP is scheduled for July 10, in Wilmington, Del. – Alan Zimmerman

 

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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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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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Capitala Finance says no energy sector loans in default in Q1

Capitala Finance said that of the five companies in its investment portfolio with direct exposure to the oil-and-gas sector, all of them were current with debt payments.

“All investments continue to perform and the fair value of oil-and-gas investments was approximately 87.2% of cost at March 31, 2015, compared to 89.5% at Dec. 31, 2014,” an investor presentation today showed.

The investments are:

  • Sierra Hamilton $15 million 12.25% secured loan due 2018, marked $14.5 million at fair value as of March 31, 2015 (no change from Dec. 31, 2014), accounting for 6.1% of net assets
  • TC Safety $22.6 million investment (6.6% lower than Dec. 31, 2014 on a fair value basis), including a 12% cash, 2% PIK subordinated loan due 2018
  • U.S. Well Services $8.8 million 11.5% (0.5% floor) secured loan due 2019 (increased by $4 million since year-end due to previous unfunded commitment)
  • ABUTEC $4.9 million 12% cash, 3% PIK term loan due 2017 (down 4.2% from year-end on a fair value basis), for 2.1% of assets
  • SPARUS, Southern Cross, EZTECH $10.5 million investment fair value as of March 31, 2015, down 0.7% from year-end

These investments at fair value total $61.3 million as of March 31, 2015, or 11.8% of the total. Fair value is 3.6% higher than at year-end.

A breakdown of Capitala Finance’s portfolio by sector showed oil-and-gas services accounted for 7% of the total portfolio by fair value, and oil-and-gas engineering and consulting services accounted for 2.8% at the end of the first quarter.

As of March 31, 2015, Capitala Finance’s portfolio comprised 54 portfolio companies with a fair value of approximately $518.9 million. Of that total, 35% was senior secured debt investments, 45% was subordinated debt, 18% was equity and warrants, and 2% was the Capitala Senior Liquid Loan Fund I.

Capitala’s portfolio as of Dec. 31 consisted of 52 portfolio companies with a fair market value of $480.3 million. Of that total, 31% was senior secured debt investments, 46% was subordinated debt, and 23% was equity and warrants.

Capitala Finance targets debt and equity investments in middle-market companies generating annual EBITDA of $5-30 million. The company focuses on mezzanine and subordinated deals but also invests in first-lien, second-lien and unitranche debt. – 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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Investors eye BDC portfolios for signs of more pain from energy sector

On the eve of first-quarter earnings, BDC investors are anxious to see whether the energy sector will inflict more pain on loan portfolios.

An analysis of the portfolios of 45 BDCs tracked by LCD shows that 31 energy-related companies with outstanding debt were in distressed territory at the end of 2014, in this case valued at 80 or less, which is a widely used definition of distressed debt. Of these, the average weighted fair value at year-end was 64 cents on the dollar.

Prior to last year’s oil price declines, there were just 10 energy-related companies with debt in distressed territory, at a weighted average of 38.5, an analysis by LCD of public filings of the BDCs showed.

First-quarter results for BDCs began to trickle in last week, and many more are expected this week. While oil prices have yet to recover fully, prices are off lows, and the outlook is relatively stable for the short term.

“While the energy exposure is still a concern, we are not expecting an influx of energy non-accruals in the quarter,” KBW analyst Troy Ward said in an April 27 research note. But if oil remains depressed, KBW expects to see an increase in loans booked as non-accrual in the second half of 2015.

Of all the distressed debt within BDC portfolios, energy accounts for about a quarter of the total. Distressed energy debt totaled $500 million of principal within BDC portfolios tracked by LCD, counted across various tranches of debt, at the end of the fourth quarter. That’s 23% of $2.2 billion by principal amount in total distressed assets.

Similarly, energy is the most concentrated sector of distressed assets across other measures of distress in the credit markets.

For example, the Oil & Gas sector accounted for 37.2% of the loans in the distressed ratio of the S&P/LSTA Loan Index. The distressed ratio tracks the percent of performing Index loans trading at a yield of L+1,000 or higher. Oil & Gas-related loans account for 4.7% of the overall Index.

Of all loans in the Index, Oil & Gas-related loans account for 4.7% as of April. Despite two defaults that totaled $1.7 billion –Walter Energy and Sabine Oil & Gas’ second-lien loan – the lagging default rate of the S&P/LSTA Loan Index by principal amount dropped to 1.26% in April, a one-year low, from 3.79% in March.

In another measure of distress in credit markets, S&P Capital IQ’s Distressed Debt Monitor, the ratio of U.S. distressed debt was steady, at 11.5% in April. Again, distressed credits are defined here as speculative-grade issues with option-adjusted composite spreads in excess of 1,000 bps over Treasuries.

The Oil & Gas sector had the highest proportion of debt trading at distressed levels, at 38%, and the highest share of distressed issues by count, at 72, and one of the largest by distressed amount, at 29.9%, as of April 15, according to Distressed Debt Monitor, which is published by S&P Capital IQ.

In a sign of stabilization in the sector, the Oil & Gas sector experienced the largest decline in the proportion of distressed issues, falling 3.9% in April, month over month, the Distressed Debt Monitor showed.

Within the BDC portfolios, energy debt accounts for 5.8% of all debt investments, or $60.7 billion (in outstanding principal).

“It’s not that things have dramatically improved, but the volatility has subsided for now. It’s reasonable to think that they are at a floor level now,” said Merrill Ross, an equity analyst at Wunderlich Securities.

Energy sector allocations vary between BDCs. Some have no exposure to the sector. At year end, CM Finance, PennantPark, Gladstone, Main Street, Apollo Investment, Blackrock Capital, TPG Specialty, and White Horse Finance had 10% or more exposure in oil-related energy, including equity investments, according to KBW research. The weighted-average fair value for energy debt across these eight lenders ranges between 86.5 and 97.9.

BDC Energy 4Q story May 2015

Fair values vary across portfolios and can be difficult to assess among small private companies. Sometimes differences across the same investment can be attributed to different cost-basis levels for each provider. The timing of changes in fair value also can vary.

Below are some examples of distressed Oil & Gas holdings as of Dec. 31, 2014.The implied bids are based on fair value to cost:

The 7.5% second-lien debt due Nov. 1, 2018 for Bennu Oil & Gas is marked at 83% of cost at Sierra Income Fund, whereas CM Finance and PennantPark mark it at 76 and 75, respectively.

The 8.75% senior secured loan due April 15, 2020 for exploration-and-production company Caelus Energy is marked at 93 at CM Finance, and 91 by WhiteHorse Finance.

The 12% mezzanine financing due Nov. 15, 2019 for New Gulf Resources was marked at 56 by Blackrock Capital Investment at the end of 2014, while PennantPark Investment marks the debt at 52. However, Blackrock Capital on April 30 reported first-quarter earnings, showing the 12% mezzanine loan now marked at 67.

A $7.5 million, 9.5% subordinated loan due 2020 to Comstock Resources was marked at $5.1 million at year-end by FS Investment, or 70 to cost. Comstock Resources, based in Frisco, Texas, is an oil-and-gas exploration-and-production company that trades on NYSE under the ticker symbol CRK.

Other distressed debt holdings in energy within BDC portfolios are of larger companies whose financial woes are well publicized.

Apollo Investment Corp. holds Venoco 8.875% notes due 2019 and had them marked at 55 as of Dec. 31, 2014. In early April, Standard & Poor’s cut the notes to D, from CCC+, and the corporate rating was lowered to SD, after the company announced the results of a below-par debt swap.

On April 22, Standard & Poor’s raised Venoco’s corporate rating to CCC+, and the senior unsecured notes were raised to CCC-, after the release of 2014 earnings and taking into account the significant loss of principal on the unsecured notes after the exchange.

In another closely tracked credit, some distressed energy sector debt in BDC portfolios is that of Sabine Oil & Gas, which defaulted on debt last month after skipping a $15 million interest payment on its second-lien term loan. Corporate Capital Trust holds 8.75% Sabine debt due 2018 and marked it at 78 in its 2014 fourth-quarter portfolio.

FS Investment (FSIC) showed a $6.3 million holding in SandRidge Energy subordinated debt due 2020, marked at 81. SandRidge Energy unsecured notes are trading in the high 60s, according to sources and trade data.

One distressed energy credit, Halcón Resources, will better weather the slump in oil prices due to the sale of $700 million of 8.625% second-lien notes due 2020 on April 21. The exploration-and-production company operating in North Dakota and eastern Texas intends to use proceeds to repay revolver debt and to fund general corporate purposes.

Main Street Capital has a holding of existing Halcón Resources bonds, the 9.75% unsecured debt due 2020, marked at 82, and HMS Income fund debt has a holding of the same debt marked at 87 (When marked to principal amount, the debt is marked at 75 at both BDCs.). – Kelly Thompson/Abby Latour

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

Follow Kelly Thompson on @MMKTDoyenne.

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3 months after shelving loan C&J Energy revives financing backing Nabors merger

Arrangers Citigroup, Bank of America Merrill Lynch, Wells Fargo, and J.P. Morgan are reviving their M&A loan deal for C&J Energy Services. A lender call is set for Wednesday at 11:00 a.m. EST. The deal backs the merger with a unit of Nabors Industries.

Of note, the purchase price declined from $2.86 billion at the time of the June announcement, to $1.5 billion, due to a $250 million reduction in cash, to $688 million, and declines in C&J’s share price. The issuer would have roughly $1.1 billion of debt at closing, and would be leveraged at roughly 2.2x. Nabors would own 53% of the merged business, and C&J shareholders would own 47%.

Arrangers haven’t provided an updated financing plan following the purchase price reduction.

The loan deal backing C&J Energy’s with the Nabors Industries completion and production-services business originally totaled $675 million and was split between a $300 million, five-year TLB-1 and a $375 million, covenant-lite seven-year TLB-2. The TLB-1 included total-leverage, secured-leverage, and interest-coverage tests, and was talked at L+350-375, with a 0.75% LIBOR floor, offered at 99, for a yield to maturity of 4.57-4.82%. The covenant-lite TLB-2 had been talked at L+375-400, with a 1% floor, at 99, to yield 5.02-5.28%.

That structure was later revised to a $640 million, five-year TLB that was talked at L+400, with a 1% LIBOR floor, offered at 98, with total-leverage, secured-leverage, and interest-coverage tests. In addition to the four arrangers, the line-up included senior co-managers Capital One and Comerica, and co-managers Amegy, DNB, Nova Scotia, and Regions. Bank of America is administrative agent.

The issuer is rated BB-/Ba2, with a stable outlook from both agencies. The loans are rated BB+/Ba1, with a 1 recovery rating.

C&J Energy Services is an independent provider of premium hydraulic fracturing, coiled tubing, wireline, pumpdown, and other complementary oilfield services with a focus on complex, technically demanding well completions. – Chris Donnelly

 

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Oil & Gas Credits Comprise 4.5% Of Outstanding Leveraged Loans

leveraged loan oil and gas outstanding

The plunge in oil prices has pummeled both leveraged loans and, more famously, high yield bonds of late.

But while some 16% of high yield bonds support oil & gas related issuers (per the Bank of America Merrill Lynch High Yield Index), only 4.5% of outstanding leveraged loans back O&G concerns, according to the S&P/LSTA Leveraged Loan Index.

Year to date, oil & gas concerns have a bit more of a presence, accounting for 7% of new issuance in the U.S.

loan issuance by industry YTD

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Oil & gas leveraged loans: Secondary prices sink, yields soar

oil gas borrowing costs

 

Though the impact of the recent plunge in oil prices on the broader S&P/LSTA Leveraged Loan Index is less severe than in the high-yield market, as discussed here, this week was nevertheless particularly brutal for loans in the sector.

As of yesterday’s close, the average bid price of first-lien oil & gas Index loans had tumbled to 90.35% of par, from 94.90 at the Nov. 28 close and down from 96.77 at the end of October, pushing the spread to maturity implied by the average bid to L+731, from L+600 at the end of November. – Kerry Kantin