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 and at — Staff reports

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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

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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

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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

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Dakota Plains Amends Forbearance Agreement; Eyes Aug. 1 Restructuring Plan

Midstream energy company Dakota Plains disclosed that it has entered into an amendment to the forbearance agreement it entered into in May. The company has also entered into an amendment to its revolver and secured a one-time waiver of revolver loan borrowing requirements.

Under the terms of the amendment made to the forbearance agreement, the termination date has been extended to Aug. 31, from July 25. Also, the company is required to submit a restructuring plan to SunTrust Robinson Humphrey, the administrative agent, before Aug. 1 together with a timeline for completing the restructuring plan.

Meanwhile, lenders have agreed to an amendment that would increase aggregate revolver commitments to $20.5 million, from $20 million, and approved a one-time waiver of certain revolver loan borrowing requirements to allow a funding in the amount of $500,000 on or around July 6.

As of March 31, 2016, there was $55.4 million outstanding under the credit facility.

In December 2015, the company extended the maturity date of a tranche B term loan that then totaled $22.5 million to January 2017, from December 2015, and modified certain covenants.

Under the terms of that amendment, the leverage ratio was set at 9.42x through the fiscal quarter ending June 30, 2016, then at a ratio of 7.52x in the fiscal quarter ending Sept. 30, 2016; 5.15x in the fiscal quarter ending on Dec. 31, 2016; and 3.5x for each fiscal quarter ending on or after March 31, 2017. The deal is also covered by a fixed-charge coverage ratio set at 1.5x. As a result of that amendment, pricing under the tranche B term loan increased by 25 bps, to L+950.

The credit facility also includes a tranche A term loan due December 2017, which then totaled $15 million, and a $57.5 million revolver due December 2017. Pricing on the tranche A term loan and revolver ranges from L+350–425, tied to a leverage-based grid.

Dakota Plains obtained the credit facility in December 2014 to buy interests from its former partner in an oil-transloading joint venture, a sand-transloading joint venture, and an oil-marketing joint venture, and to refinance unsecured promissory notes. —Richard Kellerhals

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Bankruptcy: Hercules Offshore Files Prepackaged Chapter 11

Hercules Offshore filed its prepackaged Chapter 11 today in Wilmington, Del., the company announced. The company said that lenders holding roughly 99.7% of its first-lien claims voted in favor of the proposed reorganization plan.

As reported, the company announced late last month that it would solicit acceptances to a prepackaged reorganization plan and file for Chapter 11. As also reported, the company only emerged from Chapter 11 last November with a new $450 million senior secured facility in place that was backstopped by a group of the company’s then bondholders (“Hercules Offshore emerges from Chapter 11,” LCD, Nov. 6, 2015).

The company said that under the terms of the current reorganization plan, the company’s assets would be marketed for sale, with those left unsold at the completion of the Chapter 11 process placed into a wind-down vehicle until sales are finalized.

The company’s international subsidiaries are not included as part of the Chapter 11 case, but will be part of the sale process, the company said.

Unsecured creditors will be paid in full in the ordinary course of business or at the completion of the Chapter 11 process.

Shareholders would receive $12.5 million in cash and interests in the wind-down vehicle if they vote as a class to accept the plan, or just interests in the wind-down vehicle if the class votes against the plan.

“Importantly,” the company said, “shareholders will have to wait until the lenders are paid in full before receiving any recovery on their interests if the class votes to reject the plan as opposed to receiving their pro rata share of $12.5 million on the effective date of the plan and incremental cash distributions thereafter based on the success of the sale process if the class votes to accept the plan.”

The company said it is continuing to solicit votes on the proposed plan from Hercules shareholders.

Akin Gump Strauss Hauer & Feld is the company’s legal counsel, PJT Partners is the company’s financial advisor, and FTI Consulting its restructuring advisor. — Alan Zimmerman

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Bankruptcy: Vertellus Files Ch. 11; Lenders to Buy Assets for $454M Credit Bid

Vertellus Specialties existing term loan lenders have agreed to purchase substantially all of the company’s U.S. and international assets for a credit bid of $453.8 million, the company announced this morning.

To implement the transaction, which will take place under Section 363 of the Bankruptcy Code, the company filed for Chapter 11 in bankruptcy court in Wilmington, Del.

The term lenders are Black Diamond Capital Management, Blackrock, BlueBay Asset Management, Brightwood Capital Advisors, and TPG Special Situations Partners, court filings show.

The company said the proposed sale would be subject to higher offers, with the deal with term lenders serving as a stalking-horse bid. The agreement carries a 3% break-up fee, plus expense reimbursements, as stalking-horse protections.

The company said in a letter to employees that it expects the sale process would take 3–4 months. In its motion for approval of bidding procedures, the company asked the bankruptcy court to schedule a bid deadline of Aug. 15, an auction date of Aug. 18, and a sale hearing for Aug. 23.

The Chapter 11 filings do not include the company’s international entities in Belgium, the U.K., India and China, although those entities are included in the sale process, the company said.

The Chapter 11 case also does not include Elma, Wash.–based Vertellus Performance Chemicals, the legal entity containing the company’s sodium borohydride business, which has separate financing agreements in place. Furthermore, Vertellus Performance Chemicals is also not included in the agreement with lenders and will remain under the ownership of Wind Point Partners.

In connection with the Chapter 11 filing, the existing lenders have also committed to provide $110 million in DIP financing “to ensure continuity through the sale process.” Interest under the facility is at L+900, with a 1% LIBOR floor.

The DIP milestone deadlines require the sale to be completed within 100 days of interim approval of the DIP. Assuming that occurs tomorrow, the deadline would be Sept. 9.

In court filings, the company explained that it had “fallen victim to certain macroeconomic forces recently afflicting the chemical manufacturing industry. Specifically, the debtors’ VAN business division [Vertellus Agriculture and Nutrition Specialties unit] operates in a highly competitive industry, and has faced a slowing of growth rates for its pyridine and picoline products, coupled with significant increases in global capacity and production, primarily from Chinese manufacturers of VAN’s primary products.”

According to a declaration filed in the case by Philip Gillespie, the company’s CFO, the company has “begun significant realignment in the supply chain and rationalization of overall business cost structure in order to mitigate these effects. These long-term efforts are expected to assist with decreased overhead, manufacturing and supply chain costs, greater margin protection and potential new revenue streams over a period of years, all of which are intended to reduce the debtors’ exposure to sustained price volatility.”

However, the company said, beyond the competitive environment it also faced liquidity constraints due to “the burden of legacy environmental and pension liabilities” and the company’s “capital structure and debt load.”

The capital structure includes a first-lien term loan, which is not included in the S&P/LSTA Leveraged Loan Index, with roughly $471 million outstanding, and a first-lien revolver with about $82 million outstanding, including $19 million with respect to certain undrawn letters of credit, court filings show. Annual principal and interest payments under the facility were $52 million.

As reported, the company skipped an interest payment in April, prompting S&P Global Ratings to downgrade the company’s corporate credit and issue level to D, from CCC

The company also said it has about $25 million in trade claims outstanding, including about $10 million that may be entitled to administrative expense priority. — Alan Zimmerman

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Linn Energy Delisted from NASDAQ; LinnCo Exchange Offer Extended

Linn Energy said yesterday it received notice that it and LinnCo would be delisted from trading on NASDAQ, as of today’s open.

The company said that the two companies are expected to begin trading on the OTC Pink Sheets marketplace today under the symbols LINEQ and LNCOQ, respectively.

Separately, the company also said yesterday it had extended its offer to exchange Linn units for shares in LinnCo, to 12 a.m. EDT on June 30. The terms of the exchange have not changed.

As reported, the exchange offer’s purpose is to permit holders of Linn units to maintain their economic interest in Linn through LinnCo, an entity that is taxed as a corporation, rather than a partnership, which may allow Linn unitholders to avoid future allocations of taxable income and loss, including cancellation of debt income that could result from the Chapter 11.

Roughly 12.07 million shares have been exchanged so far, representing about 69% of Linn Energy’s outstanding units, the company said. — Alan Zimmerman

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Caesars Appoints Former Bankruptcy Judge as Restructuring Officer as CEOC Talks Appear To Stall

Caesars Entertainment Corp. appointed former Manhattan Bankruptcy Court Judge Robert Gerber as its chief restructuring officer, the company announced late on Friday, a potentially ominous sign for the prospects of a consensual settlement in the Chapter 11 case of the company’s unit, Caesars Entertainment Operating Co. (CEOC).

Gerber was a bankruptcy court judge for 14 years. Among his more notable cases were General Motors, Adelphia Communications, and LyondellBasell.

Gerber retired from the bench on Dec. 31, 2014, although he remained available as a recall judge through Jan. 22 of this year. He joined Joseph Hage Aaronson LLC as of counsel on Feb. 3.

As CRO, the company said Gerber would “[advise] on a potential restructuring of Caesars Entertainment if the company cannot resolve its differences with [CEOC] and its creditors with regard to CEOC’s restructuring and related litigation against Caesars Entertainment, or if other factors make a potential restructuring of Caesars Entertainment advisable.”

In its first-quarter earnings release issued earlier this week, the company said that while it “currently contemplates liquidity to be sufficient through the end of the year, Caesars Entertainment’s cash balance will be consumed by expenses associated with the CEOC restructuring unless it identifies additional sources of liquidity to meet ongoing obligations as well as to meet its commitments to support the CEOC restructuring.”

The company added that unless it is able to obtain additional sources of cash, or if CEOC does not emerge from bankruptcy “on a timely basis on terms and under circumstances satisfactory to Caesars Entertainment, it is likely that Caesars Entertainment would seek reorganization under Chapter 11 of the Bankruptcy Code.”

Among other things, the company said it has so far spent $345 million on legal and professional fees associated with the CEOC restructuring and Chapter 11.

The company also reiterated its previous warning that a bankruptcy filing could result from adverse rulings in pending litigation in Federal and state courts in New York and Delaware, alleging fraudulent conveyance and other claims against it in connection with various restructuring transactions undertaken by the company in the years ahead of CEOC’s Chapter 11 filing in January 2015.

Those cases were automatically stayed against CEOC as a result of the Chapter 11 filing, but they continued as against Caesars Entertainment Corp. In late February, however, Chicago Bankruptcy Court Judge Benjamin Goldgar enjoined those cases from proceeding against Caesars Entertainment, in order to give the CEOC and its creditors a window to negotiate a consensual reorganization plan (see “Caesars bondholder suit halted as parties await examiner’s report,” LCD, Feb. 29, 2016). The injunction expires on May 9, however, and Goldgar has recently indicated that he does not plan to extend the injunction at this time, although it is worth noting that trials are currently imminent in the pending cases.

Meanwhile, voluntary mediation in CEOC’s Chapter 11 is continuing under former Federal Judge Joseph Farnan, Jr. More than 20 parties have agreed to participate, but the only publicly disclosed progress so far has been a tentative deal reached with a group of holders of the company’s 10.75% senior notes due 2016.

That possible deal is nothing to sneeze at, but it is the company’s second lien lenders, who are positioned to benefit the most from the potential lawsuits against Caesars Entertainment, that hold the key to a global settlement of CEOC’s Chapter 11.

The company, for its part, has long conceded a willingness to settle the claims in the context of a reorganization plan. The dispute has been over valuation.

Fred Kleisner, the chairman of the company’s strategic alternatives committee of the board of directors, said in Friday’s news release, “Caesars Entertainment has offered substantial value to CEOC in an effort to end the protracted and expensive bankruptcy proceedings of CEOC. Despite a proposal that would provide CEOC and its creditors with value that Caesars Entertainment believes would be more than sufficient to address the findings of the examiner, as well as settle the ongoing guarantee litigation pending against the company, there remains disagreement between the parties, over how to quantify and allocate this value.”

For reference, the company had valued its total contribution under CEOC’s most recently proposed reorganization plan at about $3.1 billion (calculated based on a $1.6 billion contribution under CEOC’s initial restructuring scheme proposed prior to its Chapter 11 filing, plus an estimated additional contribution of $1.5 billion in connection with the amended plan filed on Oct. 8, 2015 (see “Caesars to contribute an additional $1.5B to amended CEOC revamp,” LCD, Oct. 8, 2016).

The court appointed examiner in the case, meanwhile, said in his report filed on March 15 that potential damages arising out potential fraudulent conveyance and breach of fiduciary duty claims rated as strong (meaning a high likelihood of success) or reasonable (meaning better than a 50/50 chance of success) range from $3.6–5.1 billion (see “Caesars examiner: fraudulent conveyance damages could reach $5.1B,” LCD, March 16, 2016).

The current timetable has a disclosure statement hearing scheduled for May 25, and a deadline for filing objections to the disclosure statement set at May 17.

As reported, in order to meet certain bankruptcy court deadlines, CEOC had filed its latest proposal in the form of a “temporary” reorganization plan and disclosure statement on April 4. The company said the proposal intentionally omitted “certain numbers, values and exhibits” needed to determine both creditor recoveries and contributions from the company’s parent, Caesars Entertainment Corp., in order to “facilitate the ongoing mediation process” in the case (see “CEOC files new plan; mediation ongoing in settlement quest,” LCD, April 5, 2016).

The company has said numerous times that if it is unable to reach a settlement with CEOC creditors, it would seek to confirm its current reorganization plan at a hearing contemplated to begin on Nov. 7.

In practical terms, that means the company would have to lay its cards on the table—that is, disclose the missing “numbers, values and exhibits”—at some point prior to May 17, although those deadlines are always subject to extension. — Alan Zimmerman

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S&P: European High Yield Corporate Default Rate Rises to 1.6% in April

European high yield default rateWith two defaults during the month, the European speculative grade corporate default rate rose to 1.6% in April, according to S&P Global.

Defaulting: Norway forest/paper products concern Norske Skog and UK oil company Edcon Holdings.

The full report on April defaults – including xls files detailing 2016 activity, corporate issuance, and European bond ratings actions – is available to S&P Global Credit Portal subscribers here. – Tim Cross

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