content

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

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

Bankruptcy: Oaktree Objection Hits Claire’s Plan Valuation, Distribution Scheme

Oaktree Capital Management on Sept. 6 objected to confirmation of Claire’s Stores’ reorganization plan, saying that “there are more than 20 material flaws” in the plan, “any one of which standing on its own could be a basis for the denial of confirmation of this plan at this time.”

Further, according to Oaktree, “taken in the aggregate, and viewed collectively as a body of work, these flaws can lead to but one conclusion: the process in these Chapter 11 cases, and the [reorganization] plan it has produced, are so tainted that the … plan cannot now be confirmed.”

As reported, a reorganization plan confirmation hearing is scheduled for Sept. 17.

The objection from Oaktree was expected. Oaktree, which holds nearly 72% of the company’s second-lien debt, has been fighting the company’s proposed reorganization plan tooth and nail since the Chapter 11 filing on March 19 (see “Claire’s 2L notes holder, Oaktree, slams RSA, proposed reorg plan,” LCD News, March 21, 2018).

As reported, prior to filing for Chapter 11 the company entered into a RSA with an ad hoc group of first-lien lenders led by Elliott Associates and Monarch Alternative Capital, as well as with the company’s equity sponsor, Apollo Management.

Among other things, the ad hoc group agreed to backstop a $575 million rights offering to fund the reorganization plan.

Under the proposed plan, first-lien lenders, with claims of about $1.43 billion, would receive 100% of the reorganized company’s equity, along with a deficiency claim—a recovery valued by the company’s disclosure statement at 69.9% (although the actual recovery will be slightly higher, just over 70%, because second-lien lenders voted to reject the plan, and therefore will not participate in the deficiency claim pool, increasing the first lien deficiency claim distribution by about $8 million).

Second-lien lenders—who, as noted, voted to reject the plan—will participate in the cash recovery for general unsecured creditors, a recovery valued at 0.003–0.495% (had second-lien lenders voted in favor of the plan, they would have participated in the deficiency claim recovery with first-lien lenders on a pro rata basis for a cash recovery of 3.5%).

Throughout the case, Oaktree has argued that the $1.4 billion total enterprise valuation upon which the RSA and proposed reorganization plan are based is too low. In late June, Oaktree successfully challenged the company’s limited and truncated initial marketing process, obtaining a court order requiring the company to extend the process through Aug. 31, and opening it to a wider variety of deals than the 100% payout-event plan initially demanded by the company.

Oaktree was expected to submit a bid in connection with that process, but apparently did not do so.

In its objection, however, Oaktree renewed its argument that the reorganization plan is nonetheless premised on a valuation that is too low.

According to Oaktree, the company’s own financial expert pegged the company’s TEV at a midpoint of roughly $1.52 billion, or $120 million more than plan value.

Oaktree said its expert valued the company at a midpoint TEV $1.992 billion, which the company said was “consistent with all indications of the debtors’ value” other than company’s aforementioned $1.52 billion valuation, which Oaktree described as an “outlier.”

Among the indications of value that Oaktree cited that were consistent with a higher valuation were a valuation of $2.022 billion used by the company in authorizing its 2016 exchange transaction, as well as “the $2.053 billion valuation implied by the percentage recovery provided to holders of general unsecured elective claims under the [reorganization] plan.”

At the higher valuation, the distribution to first-lien lenders would exceed the value of first-lien claims, Oaktree argued. Oaktree also noted that the full value of the first-lien lenders’ participation rights in the new money investment, given the low valuation and the rights offering’s below market rates and plan discounts, was not fully factored into the plan’s recovery calculations.

As for the company’s efforts to market test its valuation, Oaktree argued that the company ran “not one, but two flawed sale processes, the admitted purpose of which was to validate the low-ball valuation that underlies the [proposed reorganization] plan, rather than to obtain a value maximizing purchase offer.”

In addition, Oaktree said the marketing process “featured zero meaningful involvement from the [creditors’] committee, which was not permitted to participate in and had no role in shaping, the debtors’ communications with bidders.”

Oaktree alleged the company’s marketing “outreach was lackluster, rushed, and overseen by a conflicted finance committee with the assistance of conflicted professionals.”

Lastly, Oaktree also said that critical information was withheld from bidders during the marketing process (although the specific information withheld was redacted from the publicly-filed objection), arguing that this issue was “particularly troublesome” because the company had justified its lower plan valuation by citing the feedback from the marketing process, namely, the lack of a bid.

According to Oaktree, however, while an independent bid from the market can be evidence of enterprise value, “the absence of a bid that the debtors deem to be qualified is evidence of nothing.”

Oaktree added, “That is particularly true here where evidence will show that bidders were influenced by the compressed timing of the process, by the taint of a contentious bankruptcy, and by the perception that the debtors would resist any bid that was not favorable to Apollo and the ad hoc first lien group.”

Moving beyond its valuation claim, Oaktree charged that provisions of the company’s proposed reorganization plan providing for the $575 new money investment from first-lien lenders were neither properly vetted nor market tested.

In addition, Oaktree argued that Apollo’s participation rights in the new money investment, amounted to a recovery to equity holders greater than that for second-lien and unsecured claims in violation of the absolute priority rule.

With respect to the specific terms of the company’s proposed reorganization  plan, Oaktree charged a wide array of gerrymandering, gifting, and classification allegations that, taken as a whole, paint a picture of purported recoveries to other unsecured creditors at the expense of second-lien lenders.

For example, Oaktree expects to recover between 0.003–0.495% of its claim, compared to recoveries of 6.2% for first-lien deficiency claims, 14.6% for unsecured note claims, and 74.2% for general unsecured elective claims.

According to Oaktree, the magnitude of the difference in treatment among different flavors of unsecured claims exceed those that have previously been held to violate the Bankruptcy Code’s prohibition of discrimination within a creditor class. Oaktree further contends that the company’s rationale for these differences, the gifting of certain carve outs from the first-lien collateral, do not meet legal requirements for such gifts. — Alan Zimmerman

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

iHeart Again Extends Forbearance as Bankruptcy Looms

iHeartMedia lenders have again agreed to forbear from calling default on the company’s missed interest payment, as the radio broadcaster continues to work on a consensual pre-arranged bankruptcy filing.

In a Form 8-K filed with the SEC, iHeartMedia said lenders have agreed to forbear on the missed interest payment until 11:59 p.m. Central Time on March 12, from the previously extended deadline of March 7.

As reported, iHeart failed to make a $106 million Feb. 1 interest payment to holders of its 14% senior unsecured notes due 2021 issued via subsidiary iHeartCommunications, entering instead into a customary 30-day grace period with lenders.

The company earlier this week filed a draft restructuring support agreement and term sheet showing senior lenders—including holders of the company’s term loans and priority guarantee notes—stand to receive 93.25% of the recapitalized equity, bridging the gap on a key sticking point of contentious year-long negotiations between the company’s sponsors and its debtholders.

iHeart is also is also operating under a customary 30-day grace period after it missed interest payments due on two series of priority-guarantee notes, ramping up the pressure among its more senior lenders to achieve a comprehensive restructuring of the company’s $20 billion debt load. — Rachelle Kakouris

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

Fieldwood Energy Files Ch. 11 Petition, Looks to Slash Debt By $1.6B Through Restructuring

Fieldwood Energy has filed for bankruptcy protection in Houston to implement a restructuring plan that would reduce the company’s debt by $1.6 billion.

In a statement, the company said it has secured a $60 million DIP to support its Chapter 11 case, and intends to raise about $525 million in capital through an equity rights offering.

Additionally, Fieldwood said it has agreed to acquire all the deepwater oil assets of Noble Energy, located in the Gulf of Mexico, which complement its existing asset base and operations.

Details of the company’s restructuring support agreement have yet to be filed with the court, but the company said it has secured support from key stakeholders, including those holding 75% in principal of its first-lien debt, 72% in principal of its first-lien last-out term loan, and 77% in principal of its second-lien term loan, in addition to private equity sponsor Riverstone Holdings.

Today, Fieldwood filed a number of customary motions, including requesting clearance to pay pre-petition claims and use its cash management system. A first-day hearing has been scheduled for tomorrow morning.

The company also requested that its case be designated as a complex Chapter 11 due to the fact that it has more than $10 million in liabilities and there are more than 50 parties in interest in the case.

Fieldwood reported $1–10 billion in assets and liabilities in its petition.

The company recently entered into forbearance with first-lien last-out and second-lien term loan lenders after the exploration-and-production company failed to make interest payments due Dec. 29.

Fieldwood, a portfolio company of Riverstone Holdings, focuses on the acquisition and development of conventional oil and gas assets in North America, including the Gulf of Mexico.

Weil, Gotshal & Manges LLP is debtor counsel; Opportune LLP is financial adviser; and Evercore Group LLC is investment banker. — Kelsey Butler/Rachelle Kakouris

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

iHeart Skips $106M Interest Payment, Enters 30-Day Grace Period

iHeartCommunications has failed to make a $106 million February 1 interest payment to holders of its 14% senior unsecured notes due 2021, entering instead into a customary 30-day grace period with its lenders.

For nearly 11 months, iHeartMedia has been negotiating the terms of a sweeping debt exchange targeting roughly $14.6 billion of its $20 billion debt load at its iHeartCommunications subsidiary, including $6.3 billion of its term loan debt. Despite sweetening the offer a month later, the out-of-court restructuring failed to gain traction with noteholder participation reported at just 0.4% at the Jan. 18 update.

After being extended multiple times, the current debt exchange deadline is 5 p.m. EST on Feb. 16.

In a press release the company said that active discussions are continuing among its lenders, noteholders, and financial sponsors on the terms of a debt restructuring.

Citi analyst David Phipps said in a note to investors this morning that he does not expect a successful debt exchange owing to varying interest among creditors. In the event of a bankruptcy, Phipps expects iHeart term loans and priority guarantee notes to trade down at least 10 points since no interest would be paid during bankruptcy.

Restructuring proposals filed with the SEC late last year disclosed iHeart’s sponsors, Bain Capital and Thomas Lee Partners, had offered creditors 87.5% of the reorganized equity, as well as 87.5% of the company’s stake in Clear Channel Outdoor, its partially owned billboard subsidiary.The filing also showed that senior lenders had yet to bridge their differences on key terms, which as reported, include the value of the Clear Channel Outdoor business, the assets of which became a source of a contention following iHeart’s disputed 2015 transfer of Clear Channel Outdoor shares to its Broader Media unit.

Bain Capital and Thomas Lee Partners–owned iHeartMedia operates as a media and entertainment company through three segments: iHeartMedia, Americas Outdoor Advertising, and International Outdoor Advertising. The company formerly known as Clear Channel changed its name to iHeartMedia, Inc. in September 2014.

Follow Rachelle on Twitter

LCD 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.

content

Leveraged Loan Portfolio Managers Foresee Steady Increase in Default Rate, to 2.24% in 2018

Rather than a sudden spike, portfolio managers of U.S. leveraged loans foresee a slow inflection higher in the headline default rate, marked by pockets of distress in certain sectors. With energy having already experienced its own default cycle, retail, broadcasting, and healthcare are seen as the next potential trouble spots.

At the macro level, participants in LCD’s quarterly survey reined in their default forecasts somewhat, but still see a steady increase, with expectations that the loan default rate will end 2018 at 2.24%, from the current 1.91%.

The sentiment is more benign than that expressed in the third-quarter survey, when respondents had forecast a 2018 rate of 2.42%.

Almost all responses regarding where the expected one-year forward default rate will fall, at year-end 2018, were in a range of 2–2.70%.

Default Rate Projection 2018

Further out, loan investors, on average, expect the default rate to finish 2019 at 2.65%. The views here, polled for the first time this quarter, for the most part (80%) ranged from 2.25–3.30%.

Looking back

The end of year is an opportune time to review the accuracy of past predictions.

Defaults within the S&P/LSTA Leveraged Loan Index jumped to 1.95% in November. While still well short of the 2.44% year-end 2017 rate predicted by loan managers this time last year, a potentially substantial default lurks in the shadows. With few expecting iHeartMedia to even hold another earnings call with its current balance sheet intact, a default on the company’s Clear Channel term loans D and E would, hypothetically speaking, push the default rate to a 33-month high of 2.63%.

LCD also asked participants when they expect the default rate to breach 3.1%—the historical average. More than half (67%) now expect this to be a 2020 event (on an intra-year basis), with only 33% expecting the historical average to be breached in 2019. This is down from 93% forecasting 2019 at the third-quarter reading.

— Rachelle Kakouris

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

S&P: As Risk, Defaults Rise in Retail, Expect Recoveries to Lag other Sectors

Amid sector challenges and rising defaults, default-related losses are likely to be higher in retail than in other sectors, especially for creditors that are either unsecured or have junior-lien positions, according to a new report published by S&P Global Ratings on Thursday.

Furthermore, with retailers historically showing a higher tendency to liquidate rather than reorganize after default, a separate report also finds that recovery prospects in a liquidation scenario are often dramatically lower than when a company continues to operate. This is because most retailers are asset light, meaning most creditors are highly dependent on profitability and cash flow as a source of repayment.

retail recoveryThe overall credit environment is generally improving amid mostly favorable economic conditions, including modest but steady GDP growth, low unemployment, tame inflation, and healthier household balance sheets. This environment—and more stable oil and gas prices—has contributed to a sharp decline in the speculative-grade default rate, which has dropped from 5.1% at the end of 2016 to 3.8% at the end of June, and now stands below the historical long-term average of 4.3%.

In contrast, distress and default levels are rising in the retail sector, with factors such as adapting to online retailing, rising competition, and shifting consumer tastes and spending habits contributing to the struggles.

In terms of trouble ahead, 18% of U.S. retail ratings are in the CCC category or lower, about double the level at the beginning of the year.

Meanwhile, the market is also signaling concern with the distress ratio —the share of speculative grade issues with option-adjusted spreads more than 1,000 bps above Treasuries—rising to 21% for the retail sector, well above that of the oil and gas sector, which has the next-highest distress ratio for a non-financial sector at 14%.

In the post-default scenario, overall recovery prospects for creditors to U.S. retailers are much lower than those for the greater domestic corporate universe, especially for creditors that are either unsecured or have junior-lien positions.

In the event of liquidation, estimated recoveries in the retail sector would be about 50% lower than going-concern recoveries on average. The full reports entitled “U.S. Retail Debt Recoveries Likely To Be Below Average Amid Sector Challenges And Rising Defaults“, and “U.S. Retail Recovery Prospects: Liquidation Could Lead To Worse Recovery Outcomes,” are available at www.globalcreditportal.com and at www.spcapitaliq.com. — Staff reports

Try LCD for Free! News, analysis, data

Follow LCD News on Twitter.

This story first appeared on www.lcdcomps.com, 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.

 

content

Bankruptcy: Breitburn Equity Panel Says It’s Been Left in the Dark on Plan Talks

The official equity committee in the Chapter 11 proceedings of Breitburn Energy said it has been “left in the dark” with respect to the company’s reorganization plan negotiations, despite the company’s assertion that those negotiations are in their “final stages.”

The equity panel’s comments came in a response it filed today to the company’s motion for approval to extend the maturity date of its DIP facility to Sept. 30, which was filed earlier this week (see “Breitburn seeks to extend DIP maturity as plan talks in final stages,” LCD News, May 3, 2017).

While the equity panel did not object to extending the DIP maturity, it said in the filing that “it does not want the court to construe its support as an endorsement of how the debtors continue to treat the equity committee in these Chapter 11 cases.”

Given prior statements from Manhattan Bankruptcy Court Judge Stuart Bernstein regarding inclusion of the equity panel in the plan process, and the impending expiration of the company’s exclusive period to file a reorganization plan on May 12, the equity committee said its exclusion from plan negotiations “has been particularly troubling.”

“The equity committee should have more than one week to negotiate a plan that creditors have been negotiating with the debtors for one year,” the panel complained. “That is not negotiation, it’s ‘take it or leave it.’”

The equity committee said that the only time the company has engaged with the panel was in order to resist its discovery requests, and that it took “ten days and multiple requests” before the company agreed to speak with the panel’s tax professionals about how to solve the CODI issue in the case. — Alan Zimmerman

Try LCD for Free! News, analysis, data

Follow LCD News on Twitter.

This story first appeared on www.lcdcomps.com, 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.

content

Distressed Debt: S&P Cuts Guitar Center to CCC+ on ‘Unsustainable Capital Structure’

S&P Global Ratings lowered its corporate credit rating on Guitar Center Holdings to CCC+, from B–. The outlook is negative.

The agency said the downgrade reflects its view that strategic operating initiatives will be insufficient to meaningfully improve revenue and profits ahead of looming sizable debt maturities in early 2019, especially in light of a challenging retail environment that S&P Global said it expects will continue.

As such, given thin EBITDA interest coverage, high debt leverage, and weak cash flow from operations and expectations at S&P Global that the company will not improve operations meaningfully ahead of its early 2019 debt maturities, the agency views the company’s capital structure as unsustainable.

Still, S&P Global believes the company will maintain access to and availability under its ABL revolver, providing adequate liquidity for operating needs, particularly for seasonal working capital requirements over the next 12 months and affording the company some time to execute on planned operational improvements.

In conjunction with the lower corporate credit rating, S&P Global also lowered its issue-level rating on the company’s $375 million asset-based lending (ABL) revolver to B from B+; its $615 million of 6.5% senior secured notes due April 15, 2019 to CCC+ from B–; and its $325 million of 9.625% senior unsecured notes due April 15, 2020 to CCC– from CCC.

S&P Global expects adjusted debt leverage to slightly improve to 9.4x in 2017 on modest EBITDA growth. Adjusted total debt to EBITDA was high at close to 10x at Dec. 31, 2016. Adjusted EBITDA interest coverage is thin at 1.3x.

As at March 14, the company has approximately $134 million of borrowing availability under the $375 million ABL revolving facility.

Guitar Center, Inc. operates as a retailer of music products in the United States. The company is based in Westlake Village, Calif. Guitar Center, Inc. operates as a subsidiary of Guitar Center Holdings, Inc. — Rachelle Kakouris

Try LCD for Free! News, analysis, data

Follow LCD News on Twitter.

This story first appeared on www.lcdcomps.com, 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.

content

SAExploration Wraps Debt-for-Equity Restructure, Nets New Loan

SAExploration entered into a new $30 million term loan agreement as part of a successful debt-for-equity restructuring.

Bondholders received new second-lien notes and equity at below-par value.

SAExplorationIn exchange for $138 million of 10% secured notes due 2019, the company issued $69 million of new 10% (11% PIK) secured second-lien notes due 2019, and 6.4 million of new common stock, following a reverse stock split.

The company announced in June it had entered a comprehensive restructuring support agreement with holders of 66% of 10% secured notes. At the close of the offer, which expired on July 22, nearly 99% of notes were exchanged.

Liens on the new second-lien notes due 2019 are subordinate to liens on an existing $20 million revolver with Wells Fargo dating from November 2014, as well as on the $30 million multi-draw senior secured term loan that SAE entered into on June 29 with certain 10% secured noteholders.

As of May 16, the borrower owed $13.4 million under the revolver.

Low oil and natural gas prices hurt the company, as well as a delayed payment for a large receivable from a specific customer due to uncertainty over tax credits from the State of Alaska.

In a debut high-yield bond issue, SAExploration placed $150 million of 10% secured notes due 2019 at par in June 2014 via sole bookrunner Jefferies. Proceeds refinanced debt and funded equipment purchases for operations in Alaska.

SAExploration provides seismic data acquisition services to oil-and-gas E&P companies, specializing in logistically challenging, remote, and environmentally sensitive regions such as Arctic Alaska, tropical South America, and shallow and deep-water marine environments. — Abby Latour

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

Follow LCD News on Twitter.

This story first appeared on www.lcdcomps.com, 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.