Loan default rates climb in August amid weakness in Energy sector

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

Loan index defaults Aug 2015


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

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

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

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

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

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


Bankruptcy: Caesars in restructuring pact with first-lien leveraged loan holders

caesarsCaesars Entertainment Operating Co. (CEOC) and its parent Caesars Entertainment Corp. (CEC) reached an agreement with CEOC’s first-lien leveraged loan lenders on the terms of a restructuring the company announced late Friday.

So far, holders of more than 50.1% of the first-lien bank claims have signed onto the agreement, according to an 8-K filed by the company this morning with the Securities and Exchange Commission.

The company said in its announcement that it continues “to engage in discussions with junior creditors to build additional support for the previously announced second-lien restructuring agreement in an effort to complete the restructuring consensually,” adding that the agreement with bank lenders “paves the way toward a confirmable plan for the restructuring of CEOC.” (See “Caesars nets revamp pact with ‘significant amount’ of CEOC 2L debt,” LCD, July 21, 2015, for a description of the second-lien restructuring agreement.)

In any event, Friday’s announcement comes a week after the company said in an earlier SEC filing that it had been unable to reach an agreement with the steering committee of bank lenders in the case (see “Caesars says it remains unable to reach deal with bank lenders,” LCD, Aug. 17, 2015, for a discussion of the issues that split the two sides).

The company said the agreement with bank lenders would, for the most part, track the current restructuring agreement in place between the company and its first-lien noteholders, albeit with certain adjustment to bank lender recoveries.

To review, under the current restructuring proposal CEOC would be split into an operating company and a REIT, which would hold ownership of CEOC’s properties. The new structure would be newly capitalized, in part, with roughly $1.6 billion of backing from CEC.

Among other things, the restructuring calls for bank lenders to receive $705 million in cash, $882 million in new first-lien debt to be issued by the contemplated operating company, $406 million of new second-lien debt to be issued by the contemplated operating company, $1.961 billion of new first-lien debt to be issued by the contemplated REIT, and up to $1.45 billion in additional cash or mezzanine debt to be issued by CPLV, a subsidiary of the REIT specifically created to hold the company’s properties located in Las Vegas.

According to today’s SEC filing, the company has now agreed to syndicate the new first- and second-lien debt to be issued by the contemplated operating company and pay an amount of cash equal to that new debt, $1.288 billion, to first-lien bank lenders.

In addition, in lieu of receiving CPLV Mezzanine Debt (as defined below), first-lien bank lenders will receive new second-lien debt in the maximum amount of $333 million to be issued by the contemplated REIT with a six-year term and interest at 8%.

Finally, on the date on which holders of 66.66% of bank claims have signed onto the agreement, or Sept. 8, whichever occurs first, CEC will make an upfront, pro rata payment of $62.5 million to bank lenders who sign onto the pact. Bank lenders agreeing to the restructuring will also be entitled to certain forbearance fees. – Alan Zimmerman



Oil & Gas companies account for more than a quarter of 2015 defaults

The global corporate default tally climbed to 70 issuers after two U.S.-based exploration-and-productions companies triggered a default in the past week. Oil & Gas companies now account for more than a quarter of defaults so far this year, according to a report published by Standard & Poor’s on Friday.

SandRidge Energy entered into an agreement to repurchase a portion of its senior unsecured notes at a significant discount to par, prompting S&P to lower its corporate credit rating on Aug. 14 to D, from CCC+, on what the agency considers to be a distressed transaction and “tantamount to a default”.

Samson Resources failed to make the interest payments due on its $2.25 billion of 9.75% unsecured 2020 notes due Aug. 15. Standard & Poor’s subsequently lowered Samson’s corporate credit rating to D, from CCC-.

Of the 70 defaulting entities, 40 are based in the U.S., 14 in emerging markets, 12 in Europe, and 4 in the other developed nations. By default type, 22 defaulted due to missed interest or principal payments, 19 because of distressed exchanges, 14 reflected bankruptcy filings, seven were due to regulatory intervention, six were confidential defaults, one resulted from a judicial reorganization, and one came after the completion of a de facto debt-for-equity swap.

Standard & Poor’s Global Fixed Income Research estimates that the U.S. corporate trailing-12-month speculative-grade default rate will rise to 2.8% by March 2016, from 1.8% in March 2015 and 1.6% in March 2014. – Staff reports


Caesars examiner probe expanded to include 2008 LBO

The bankruptcy court overseeing the Chapter 11 proceedings of Caesars Entertainment Operating Co. has expanded the scope of the investigation by the court appointed examiner in the case to specifically include the company’s 2008 LBO, according to an Aug. 19 entry on the court docket.

The court’s order follows a negotiated agreement among key parties in the case with respect to the scope of the probe, including the company, the unsecured creditors’ committee, the ad hoc committee of first-lien bank lenders and the ad hoc committee of first-lien noteholders.

According to the agreed-upon court order, the 2008 LBO will now be among the “challenged transactions” within the scope of the examiner investigation.

The examiner appointment
As reported, the Chicago bankruptcy court on March 12 ordered the appointment of an examiner to investigate certain pre-petition transactions entered into by the company. The scope of the investigation was defined as those transactions that had already been subjected to challenge by second-lien lenders in the case as potential fraudulent conveyances intended to transfer assets away from the company to CEC or other units of CEC, while leaving CEOC saddled with debt.

The 2008 LBO was not among those transactions.

The broad scope of the examiner appointment, however, also included “any other transactions involving the debtors, to the extent those transactions suggest potential claims belonging to the estates, including causes of action against any current officers or directors of the debtors, and former officers or directors of the directors, or any affiliates of the debtors, and … any apparent self-dealing of conflicts of interest involving the debtors or their affiliates,” and invited the examiner of parties to the case to seek modifications to the scope if they deemed it necessary.

On March 24, the bankruptcy court named New York lawyer Richard Davis as the examiner.

According to a June 30 motion filed by the company, while the 2008 LBO was not specifically identified as one of the transactions that Davis should investigate, “for clarity the debtors seek to expand the scope of the examiner’s investigation to expressly include the LBO.”

According to the company, at least one party had raised questions regarding potential LBO claims in the case “which if unresolved may impede the debtors’ efforts to reach a consensual plan.”

The company also asserted that Davis’ conclusions with respect to the potential strengths and weaknesses of the potential LBO claims would, “like the other transactions he is investigating … be particularly helpful in assisting the parties in plan negotiations.”

The unsecured creditors’ committee in the case, however, opposed the motion, calling it a “tactical maneuver to frustrate” the committee’s efforts to bring lien challenges in the case.

The committee said it had been investigating, and “already [had] identified several grounds to challenge certain of the pre-petition liens.” More specifically, the panel said, “one such ground is that the pre-petition liens were granted by subsidiaries for no value while they may have been insolvent or under-capitalized.”

The committee said that its raising of these potential challenges – and a hope of curtailing them — was the impetus behind the company’s motion to expand the scope of Davis’ investigation.

Examiner’s report
Meanwhile, earlier this month Davis separately filed his third interim report on his progress with the bankruptcy court. As is typical for such investigations, Davis said he has faced numerous issues with respect to discovery of documents and other evidence.

In the report, Davis said that unless the discovery issues were resolved by Aug. 17, “it would be difficult for” him to file a final report within the timeframe currently contemplated by the current restructuring-support agreement in the case – namely, by Nov. 15, or by Dec. 15, “at the latest.”

It is unclear what further effect, if any, the expansion of the scope of the investigation might have on the current timing of Davis’ report. – Alan Zimmerman


American Apparel raises going concern warning as losses deepen

Embattled clothing retailer American Apparel issued a going concern warning on Monday, stating once again that it may not have enough liquidity to continue its operations for the next 12 months amid deepening losses and negative cash flows.

American Apparel said in an SEC filing after yesterday’s close that it had reached an agreement with a group of lenders, led by Standard General, to replace its $50 million credit facility with a $90 million asset-based revolver, maturing April 4, 2018. Wilmington Trust replaces Capital One as the administrative agent, the filing said.

Despite the cash infusion, American Apparel further warned that if it is unsuccessful in addressing its near-term liquidity needs or in adequately restructuring its obligations outside of court, it “may need to seek protection from creditors in a proceeding under Title 11” of the US bankruptcy code.

Note the company has a $13 million interest payment on its 15% first-lien 2020 bonds in October.

Shares in the name fell 4% to 14 cents as at mid-morning on Tuesday, having lost more than 85% this year.

As reported, American Apparel said it had been in ongoing discussions with Capital One regarding a potential waiver in an effort to avoid a potential default, and as a result of these discussions, was unable to file its second quarter 2015 10-Q filing before the regulatory deadline.

According to yesterday’s filing, the company was not in compliance with the minimum fixed charge coverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2015 through June 30, 2015 covenant reference period, its coverage ratio was 0.07 to 1.00 as compared with the covenant minimum of 0.33 to 1.00, and its adjusted EBITDA was $4,110 compared with the covenant minimum of $7,350. The covenant violations were waived under the Wilmington Trust Credit Facility.

The retailer on Monday confirmed its second-quarter results, released on a preliminary basis last week. As reported, second-quarter net losses jumped 20% to $19.4 million, or $0.11 per share, from a loss of $16.2 million, or $0.09 per share in the year-ago period. This is the company’s 10th consecutive quarterly loss.

Revenue fell approximately 17% from the year-ago period, to $134 million.

Adjusted EBITDA for the three months ended June 30, 2015 was $4.1 million, versus $15.9 million for the same period in 2014. As of Aug. 11, 2015, American Apparel had $11,207 in cash.

As reported, the company said it has begun discussions to analyze “potential strategic alternatives,” which may include refinancing or new capital raising transactions, amendments to or restructuring of its existing debt, or other restructuring and recapitalization transactions.

American Apparel is rated CCC- by Standard & Poor’s, with negative outlook. Its 13% senior secured notes due 2020 are rated CC, with a recovery rating of 5. Moody’s last week downgraded the company to Caa3 from Caa2, and placed the company under review for downgrade. – Rachelle Kakouris


Patriot Coal leveraged loan creditors to see 80% recovery under plan

Patriot Coal filed an amended reorganization plan and disclosure statement yesterday with the bankruptcy court overseeing its Chapter 11 proceedings reflecting the deal announced yesterday to sell its remaining assets to an affiliate of the Virginia conservation Legacy Fund.

The filing also provided estimated recovery rates for the company’s leveraged loan creditors, showing that holders of the company’s term loan would recover 80% of their claims, plus rights to participate in the first-lien rights offering under the plan.

Holders of existing PIK notes claims would recover 3.27% of their claims, plus new Class B units in the reorganized company and rights to participate in the second-lien rights offering contemplated under the proposed plan.

Meanwhile, the company delayed the hearing on the adequacy of its disclosure statement by one day, until today. The hearing had initially been set for yesterday.

The company also delayed the key hearing on rejection of its labor agreements and certain pension obligations under Sections 1113 and 1114 of the Bankruptcy Code to Sept. 1. That hearing had been set for today.

The company filed for Chapter 11 on May 12 in Richmond, Va.

As reported, rejection of the company’s existing collective-bargaining agreements with its unions is a condition of the proposed sale of the bulk of its assets to Blackhawk Mining, the transaction underpinning the company’s reorganization plan.

Under the proposed Blackhawk transaction, Blackhawk would obtain a new first-lien credit term facility in the amount of $646 million, the first $300 million of which would be allocated to replace, in full, Blackhawk’s existing funded debt.

The facility would then be used to replace up to $109 million of indebtedness under Patriot’s DIP facility and up to $237 million of the company’s drawn letters of credit. In addition, Blackhawk would arrange for a new ABL and letter of credit facility, in amounts to be determined, with the latter issued to replace existing undrawn letters of credit.

Post-closing, Blackhawk would issue up to $297 million of new second-lien debt to holders of Patriot’s existing senior secured term loan (up to $247 million) and existing second-lien PIK notes (up to $50 million), along with new Class B membership interests in Blackhawk representing a 30% equity stake.

In addition, the deal provides for a $50 million rights offering to holders of the company’s existing senior secured term loan ($19 million) and second-lien PIK notes ($31 million), “in order to raise cash on the balance sheet for the post-closing Blackhawk.” Knighthead Capital, Caspian Capital, Davidson Kempner Capital and Hudson Bay agreed to backstop the rights offering (see “Patriot Coal files plan; disclosure statement hrg set for Aug. 17,” LCD, July 14, 2015). – Alan Zimmerman


Loan defaults set to hit 6-month high with Samson Resources Ch 11 filing next month

The default rate of the S&P/LSTA Leveraged Loan Index will increase to 1.27% by principal amount next month, from 1.17%, when Samson Resources via Samson Investment Company files for bankruptcy, tripping a default on its second-lien secured loan. The default rate by issuer count will tick up to 0.77%, from 0.67%, according to LCD.

The default rate would be at a six-month peak, or the highest level since 3.79% as of March 31, although that was including Energy Future Holdings, which is no longer counted in the default rate due to the rolling-12-month basis. Excluding EFH, the default rate post-Samson would hit its highest level since February 2014 when it was 1.86%, according to LCD.

Privately held, KKR-controlled Samson on Friday announced publicly that it has entered into a restructuring support agreement with certain lenders holding 45.5% of the company’s second-lien debt, and with its sponsor on a proposed balance sheet restructuring that “would significantly reduce the company’s indebtedness and result in an investment of at least $450 million of new capital.”

Under the terms of the RSA, second-lien lenders, including Silver Point, Cerberus and Anschutz, have agreed to invest at least $450 million of new capital to provide liquidity to the balance sheet post reorganization and permanently pay down existing first-lien debt, the company said.

As a result, the company said it would not make the interest payment due today under its sole outstanding corporate issue, the $2.25 billion of 9.75% unsecured notes due 2020, but instead would use the 30-day grace period triggered by its non-payment “to build broader support for the restructuring and continue efforts to document and ultimately implement the reorganization transaction as part of a Chapter 11 filing.” The debt is worthless, trading below 1 cent on the dollar, down from around 30 in March, and a par context a year ago before the bear market mauling in oil.

The Samson loan default would not be particularly large, as the second-lien term loan was originally $1 billion in the Index. However, it’s notable as the second largest loan default this year, or since Caesars Entertainment kicked off the New Year in mid-January with the sixth largest default on record, at $5.36 billion across four tranches in the Index, according to LCD.

Assuming no other defaults leading up to Samson next month, it would become sixth loan-issuer default in the Index this year, following rival coal credits Alpha Natural Resources earlier this month, Patriot Coal in May, and Walter Energy in April, as well as exploration-and-production company Sabine Oil & Gas in April. Meanwhile, the eight ex-Index defaults this year are Altegrity, Allen Systems, American Eagle Energy, Boomerang Tube, Chassix, EveryWare, Great Atlantic & Pacific Tea, and Quicksilver Resources.

The shadow default rate for the Index is currently at 0.72%, down from 0.82% last month, but nearly triple the 0.29% rate in April. There is $5.51 billion of Index outstandings on the shadow list, and that includes Samson since its hiring of Kirkland & Ellis and Blackstone Group in February. This rate includes loans that are paying default interest but which are still performing, loan issuers that have bonds in default, and issuers that have hired bankruptcy counsel or that have secured a forbearance agreement.

There are five loan issuers on the shadow list that are publicly known. Beyond Samson, it’s Gymboree, Dex Media, Millennium Health, and Vantage Drilling, all of which are consulting advisors. – Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.


Altegrity nets confirmation of reorganization plan

The bankruptcy court overseeing the Chapter 11 proceedings of Altegrity on Aug. 14 confirmed the company’s reorganization plan, according to a court order filed in the case.

As reported, the Wilmington, Del., bankruptcy court approved the adequacy of the company’s disclosure statement on May 15, but the confirmation hearing, initially set for July 1, was delayed several times, finally until Aug. 14, for undisclosed reasons.

Under the company’s plan, first-lien debt of $1.119 billion, comprised of a term loan with an allowed claim of $294.2 million in principal (about $273.6 million of term debt and $21 million in letters of credit issued under a related revolver) and first-lien notes in the principal amount of $825 million, plus accrued but unpaid interest and reimbursement of certain professional and other fees, is to be reinstated.

Holders of second-lien notes, meanwhile, are to receive 96.91% of the company’s reorganized equity, holders of third-lien notes are to receive 1.98% of the equity, and holders of the company’s unsecured notes are to receive 1.11% of the equity.

The company has estimated its reorganized equity value at $153-362 million, with a midpoint of $256 million, which is based on an estimated total enterprise value of $1.235-1.444 billion, with a midpoint of $1.338 billion, less net debt of $1.082 billion.

Thus, the midpoint of the company’s valuation translates into a recovery of 47.8% for second-lien notes (based on about $519.3 million of allowed claims), a recovery of 7.6% for third-lien notes (based on roughly $66.3 million of allowed claims), and a recovery of 5.4% for unsecured noteholders (based on about $53 million of allowed claims).

The company has also set aside $1.25 million in cash for general unsecured claims, meaning that general unsecured creditors would recover 11.9%, based on $10.5 million of allowed claims.

As reported, the company filed for Chapter 11 on Feb. 9, with a restructuring-support agreement that the company said had the backing of holders of more than 75% of the company’s first-lien secured debt, and holders of about 95% of the company’s second- and third-lien secured debt. The company subsequently tweaked the proposed recoveries under the RSA slightly, however, in order to win the backing of the unsecured creditors’ committee appointed in the case and smooth the path to confirmation (see “Altegrity tweaks plan recoveries to gain backing of creditor panel,” May 13, 2015) – Alan Zimmerman


Main Street Capital books $4.7M loss in 2Q for Family Christian loan

Main Street Capital booked a $4.7 million loss for an investment in retailer Family Christian in the recent quarter, resulting in a decline in the share of its portfolio companies on non-accrual status.

Main Street Capital realized the loss for the investment in the quarter ended June 30, a 10-Q released today showed. Specialty Christian retailer Family Christian, based in Grand Rapids, Mich., filed for bankruptcy in February.

Main Street Capital’s investment in FC Operating as of March 31 comprised $5.4 million of secured debt due November 2017 (L+1,075, 1.25% LIBOR floor) and was listed as non-accrual at that time.

Due to the exit of the private loan investment in Family Christian, Main Street Capital has only four investments on non-accrual status. These investments comprised 0.3% of the fair value of Main Street’s investment portfolio, and 3.1% on a cost basis. This compares to 1.2% of the investment portfolio’s fair value on March 31, and 3.9% on a cost basis.

The four investments currently on non-accrual status are the same as in the previous quarter: Quality Lease and Rental HoldingsCalloway LaboratoriesModern VideoFilm, and Clarius BIGS.

Quality Lease and Rental Holdings, based in El Campo, Texas, provides oilfield rental equipment, products, and services. The company operates as a subsidiary of oilfield housing company Rocaceia, which filed for Chapter 11 in October with debt of $10-50 million.

Main Street Capital’s investment in Quality Lease and Rental Holdings included $30.8 million of 12% secured debt whose fair value was booked at under $1 million as of June 30.

Main Street Capital’s investment in Calloway Laboratories includes a $7.3 million 12% PIK first-lien term loan due 2015, marked at $2.8 million at fair value as of June 30. Calloway Laboratories, based in Woburn, Mass., provides clinical toxicology laboratory services, specializing in proprietary drug testing protocols.

The investment in Modern VideoFilm included a $6.3 million first-lien term loan due 2017 (L+500, with a 1.5% floor, 8.5% PIK), was marked below $1 million as of June 30. The Burbank, Calif.-based company provides post-production services to the film and television industry.

A loan for Clarius BIGS was also on non-accrual, comprised of $4.4 million of 12% secured debt, marked at $1.7 million as of June 30. The company provides prints and advertising film financing. It is a sister company of Clarius Entertainment, which is a Los Angeles-based feature film acquisition, marketing, and distribution company.

Houston-based Main Street provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. The business-development company trades on the NYSE under the ticker MAIN. – Abby Latour

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