Gladstone Capital adds GFRC Cladding Systems loan to non-accrual

Gladstone Capital added GFRC Cladding Systems to non-accrual status in the quarter ended March 31, citing declining operation performance.

The investment comprised a $4.9 million 10.5% first-lien debt due 2016, marked under one million at fair value as of March 31; $6.6 million of second-lien debt due 2016, marked at $1.9 million at fair value; and a line of credit, a Ma y 6 10-Q filing showed.

GFRC Cladding Systems designs and manufactures glass-fiber-reinforced concrete panels for commercial construction projects greater than four stories in height. It is a portfolio company of Dallas-based middle-market private equity firm Transition Capital Partners.

The other two companies on non-accrual status in the recent quarter were Sunshine Media and Heartland Communications.

Some tranches of the investment in Sunshine Media were moved to accrual status in the quarter as a result of improving profitability and liquidity.

The investment in Sunshine Media comprised first-lien debt, a line of credit, and equity. Sunshine Media, based in Chattanooga, Tenn., publishes local business-to-business custom publications with titles such asBuilder/ArchitectDoctor of Dentistry, and MD News.

The investment in Heartland Communications comprised a $4.3 million 5% term loan due 2014, a line of credit, and equity. Heartland Communications, based in Appleton, Wis., operates AM and FM radio stations in Park Falls, Eagle River, and Ashland, Wis.; and Iron River and Houghton, Mich.

As of March 31, 2015, debt of three portfolio companies on non-accrual status totaled $39.2 million on a cost basis, or 10.2% of all debt investments, and $9.2 million, or 2.8% at fair value.

As of Dec. 31, 2014, non-accrual debt on a cost basis totaled $33.6 million over two portfolio companies, or 9.4%, and $8.3 million, or 2.8%, at fair value.

Gladstone Capital, which trades on Nasdaq under the symbol GLAD, is an externally managed BDC that invests in debt and equity of small and midsize U.S. businesses. – Abby Latour

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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

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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

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PennantPark, a BDC, to buy assets of struggling rival lender MCG Capital

PennantPark Floating Rate Capital, a business-development company, announced plans today to expand its portfolio through the acquisition of MCG Capital, a struggling lender to middle-market companies that had taken steps to wind down its portfolio.

PennantPark Floating Rate Capital, which trades on the NASDAQ under the symbol PFLT, will acquire MCGC in a $175 million cash-and-stock transaction, or $4.75 per MCGC share. MCGC stockholders will receive $4.521 in PFLT shares and $0.226 per share in cash from PennantPark Investment Advisers, and possibly an additional $0.25 depending on PFLT’s NAV over a 10-day period.

MCGC shares jumped 10% today, to $4.51, from $4.10 at yesterday’s close on the Nasdaq.

Boards of both companies approved the transaction. Stockholders of both companies need to agree to the transaction. The deal is expected to close in the third quarter.

The equity base of the combined company is expected to total $376 million.

“A balance sheet of this size will allow the combined company to be a more important provider of capital to middle-market sponsors and corporate borrowers,” a joint statement today said.

“PFLT expects, over time, to deploy most of MCGC’s cash into an investment portfolio consistent with that of PFLT’s existing loan portfolio.”

The deal is a boon to MCGC shareholders. In October, MCG Capital announced it was winding down its portfolio and buying back its stock with asset-sale proceeds, citing a credit-cycle peak. In February, MCG Capital announced it was exploring a potential sale.

“Our stockholders should benefit through resumed receipt of dividends and ownership in a company with a strong balance sheet and proven track record,” said Richard Neu, Board Chairman of MCG Capital.

PennantPark Floating Rate Capital shares traded higher after the announcement, touching $14.23, but have since erased gains to trade steady, at $14.15 on the Nasdaq, which was overall lower. Investments in middle-market companies can be difficult to acquire, except over an extended period. Buying an entire portfolio can be an attractive way to acquire a significant amount of assets at once in the competitive marketplace. Investors of debt in middle-market companies usually find economies of scale from larger holdings.

Another huge portfolio of middle-market assets is currently on the auction block. GE unveiled plans this month to sell GE Capital, the dominant player in middle-market lending. Leveraged Commentary & Data defines the business as lending to companies that generate EBITDA of $50 million or less, or $350 million or less by debt size, although definitions vary among lenders.

MCG Capital, formerly known as MCG Credit Corp., was a specialty lender focused on telecoms, communications, publishing, and media companies that was spun off from Signet Bank. Over the past decade, the company managed to shed some underperforming assets and diversify, but the company remained saddled with legacy assets from poorly performing traditional businesses.

PennantPark Floating Rate Capital is an externally managed business-development company, or BDC. The lender targets 65% of its portfolio for investments in senior secured loans and 35% in second-lien, high yield, mezzanine, distressed debt, and equity of below-investment-grade U.S. middle-market companies. The portfolio totaled $354 million at year-end on a fair-value basis.

PennantPark Investment Advisers receives fees from PennantPark Floating Rate Capital for investment advising, some of which are linked to performance of PFLT.

In December, MCG Capital announced the results of a Dutch auction, saying it bought 4.86 million shares for $3.75 each, representing 11.2% of shares outstanding, for a total of $18.2 million. MCG also reinstated an open market share repurchase program. In total, MCG Capital bought more than 31 million shares in 2014, totaling more than $117 million.

In April, MCG Capital completed a sale of Pharmalogic, marking the exit of all of the lender’s control investments. MCG Capital provided a $17.5 million, 8.5% first-lien loan due 2017, and a revolver, to facilitate the sale. Pharmalogic is a nuclear compounding pharmacy for regional hospitals and imaging centers.

MCG Capital had also struggled with a few poor, but isolated, bets, market sources said.

One misstep was MCG’s investment in Broadview Networks. The company, a provider of communications and IT solutions to small and midsize businesses, filed for Chapter 11 in 2012. MCG Capital owned more than 51% of the equity at the end of 2011.

Another black eye for MCG Capital was an investment in plant-and-flower producer Color Star Growers of Colorado. The company filed for bankruptcy in December 2013, resulting in a loss of $13.5 million that year for MCG Capital. Regions Bank claimed its losses totaled $35 million for the transaction.

MCG Capital filed a suit against the company’s auditor, alleging accounting fraud and material misrepresentation of Color Star’s financial state at the time of a subordinated loan transaction with Color Star in November 2012.

Some say the writing was on the wall as MCG Capital underwent a series of senior management changes. Keith Kennedy became CEO in April, succeeding B. Hagen Saville, who retired. In November 2012, Saville took over from Richard Neu, who stayed on as board chair. Neu was elected to the post in October 2011, taking over from Steven Tunney, who left the company to pursue other interests. – Abby Latour

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Bankruptcy: Chassix says reorg still ‘on pace’ despite flak from creditor panel

Ahead of its hearing on the adequacy of its disclosure statement scheduled for tomorrow, Chassix confirmed that it “remains on pace to emerge from Chapter 11 on the same time frame as when [it] commenced these cases,” despite the filing of objections last week to its disclosure statement from the official unsecured creditors’ committee in the case and the U.S. Trustee for the bankruptcy court in Manhattan.

That time frame would see the company emerge from Chapter 11 by the end of July.

In that regard, it is worth noting that according to an amended disclosure statement filed yesterday, the company is seeking to schedule a confirmation hearing on June 30, and set a deadline for an effective plan date of July 31. That schedule represents only a slight delay from the company’s initial time frame, which sought a confirmation hearing on June 18 and set an emergence deadline of July 17.

As reported, Chassix filed for Chapter 11 on March 12, saying that it had reached agreement on a “comprehensive restructuring and recapitalization of the company” supported by 71.5% of its senior secured bondholders, 80% of its unsecured bondholders, its existing equity sponsor Platinum Equity, and all of its largest customers (including Ford, GM, FCA f/k/a Chrysler, Nissan, and BMW).

The proposed restructuring would convert roughly $375 million of the company’s senior secured notes into 97.5% of the reorganized company’s equity (subject to dilution), while holders of $158 million of the company’s unsecured notes would receive 2.5% of the new equity (subject to dilution) and warrants to purchase an additional 5%. The company’s customers, meanwhile, would provide, among other things, a “long-term accommodation” that includes about $45 million in annual price increases, and new business and programs, as well as waiving certain reorganization plan distributions, agreements that the company said were “central to the plan.”

Last week, however, the unsecured creditors’ panel filed an objection to the proposed disclosure statement, saying it had “significant concerns regarding the plan’s potentially inadequate allocation of value to unsecured creditors.”

Rather that filing a full-throated objection to the disclosure statement, however, the committee asked the company to include a letter with the disclosure statement setting out its concerns, adding that it “cannot, at this time, recommend that creditors vote in favor of, or against, the plan,” and recommending that “prior to voting on the plan, each unsecured creditor carefully review the materials provided to them, including, and especially,” the committee’s letter.

The company agreed to include the letter in the disclosure statement.

More specifically, the panel’s concerns are with the company’s enterprise and distributable valuations ($450-550 million, with a midpoint of $500 million, and range of $280-380 million, respectively), which are below the amount of secured claims and therefore, as a liquidation matter, would leave no recovery for unsecured creditors. That said, the reorganization plan does allocate 2.5% of the reorganized equity to unsecured noteholders, and $1 million in cash for general unsecured claims, with the potential for an additional $6 million for certain trade claims.

Among other things, the committee said it had concerns with the company’s valuation methodologies, financial projections, valuations of potential avoidance actions, and the claims placed in the unsecured claims pool.

The committee said it was currently investigating potential causes of action against the company’s equity sponsor, Platinum Equity, for fraudulent conveyance, breach of fiduciary duty, intentional fraud, gross negligence, and willful misconduct relating to the issuance of the company’s unsecured notes and the use of the proceeds of those notes to fund a $100 million special dividend to Platinum.

“The committee believes that at the time that the special dividend was paid, the debtors’ directors were aware, or should have been aware, of the debtors’ contractual commitments (some of which had been entered into many years prior) that would ultimately contribute to the debtors’ operational and financial difficulties in 2014.”

According to the first-day declaration filed in the case by Chassix president and CEO, J. Mark Allen, the company’s financial difficulties were precipitated by a “severe liquidity crisis” in November, 2014, arising from a “perfect storm of events,” which he described as “underpriced contracts and programs, compounded by a marked spike in the demand for automobile production in North America at a time when there was limited capacity in the machining and casting sectors.” Those circumstances, Allen said, “overwhelmed the debtors’ manufacturing facilities and capabilities,” and eventually “resulted in an onslaught of quality issues and missed release dates that significantly increased the debtors’ costs of manufacturing.”

Allen’s declaration further said, “[b]y the fourth quarter of 2014, these operational issues – which had snowballed at a rate that neither the debtors, their customers, nor any of their other constituents had anticipated – had severely impacted the debtors’ cash flows and erased any operating profit they had hoped to achieve due to the increase in production demand.”

The company has argued that any potential recoveries from claims against Platinum would not be “meaningful,” and while the proposed plan does include a purported “global settlement” of potential claims against Platinum under which the equity sponsor agreed, in exchange for full releases, “to take, or not to take, certain actions that could impact the tax attributes” of the reorganized company, the creditors’ committee called this contribution “negligible,” saying it needed to independently investigate the potential claims.

In addition, the committee also raised concerns about the procedure for creditors to consent to third party releases contained in the plan, saying the process set a death trap for creditors under which they are forced to consent to the third party releases in order to accept the plan. A subsequent objection from the U.S. Trustee for the Manhattan bankruptcy court raised a similar issue.

The company, however, responded that its process was consistent with the law. – Alan Zimmerman


Restructuring: American Eagle Energy nets forbearance after missing first coupon

American Eagle Energy has entered into a forbearance agreement to negotiate the terms for a restructuring of its balance sheet after the Colorado-based exploration-and-production operator failed to make the first coupon payment on its $175 million of 11% first-lien notes due 2019 issued in August last year.

Lenders to American Eagle Energy have agreed not to call defaults on the missed $9.8 million coupon payment due March 1 after the company made a partial interest payment of $4 million, leaving $5.8 million unpaid.

The agreement, which was put in place by four holder who collectively own more than 50% of the notes, gives American Eagle Energy until May 15 to assess its liquidity situation regarding the remaining partial interest payment, or to “negotiate and effectuate a restructuring,” the company said in a statement on Tuesday.

As part of the forbearance, the energy concern is required to retain a restructuring advisor, a temporary chief financial officer, consultant, financial advisor and/or other third-party professional no later than April 10.

SunTrust Bank, meanwhile, said it has given notice of its resignation as control agent under the agreement.

As reported, American Eagle Energy last month skipped the first coupon payment due on a $175 million issue of 11% first-lien notes due 2019 and the company entered into the typical 30-day grace as it seeks to explore “options to strengthen its balance sheet.

American Eagle debuted in market less than seven months ago with the first-lien notes via GMP Securities, and proceeds were used to refinance an existing credit facility and fund general corporate purposes. As reported, co-managers included Canaccord Genuity, Global Hunter, and Johnson Rice. A “long first coupon” due March 1 includes extra interest due prior to Sept. 1, 2014, as settlement was Aug. 27.

Issuance was 99.06 at offer, to yield 11.25%, which was wide of the 11%-area guidance. The debt edged higher on the break, but soon succumbed to the bear market in the oil patch. Indeed, valuation moved to the 50 context after the OPEC bombshell over Thanksgiving, from the high 80s earlier in autumn, and market quotes were recently quoted in the low 30s, according to sources. The bonds last traded in the 32 context in mid-March from the low 40s around the time of the default.

Ratings were CCC/Caa1 at issuance, but have since been lowered to D, from CCC+, by S&P, and Ca by Moody’s.

Denver, Colo.-based American Eagle Energy is an independent exploration-and-production operator focused on the Bakken and Three Forks shale-oil formations in the Williston Basin of North Dakota and Montana. The company trades on the NYSE under the symbol AMZG, with an approximate market capitalization of $5.5 million, down from $180 million at the time of bond issuance in August. –  Staff reports


US Trustee names New York lawyer Richard Davis as Caesars examiner

The U.S. Trustee for the bankruptcy court in Chicago has named Richard J. Davis as the examiner in the Chapter 11 case of Caesars Entertainment Operating Co., court filings show.

The appointment is subject to approval by the bankruptcy court in Chicago that is overseeing CEOC’s Chapter 11.

As reported, the Chicago bankruptcy court on March 12 ordered the U.S. Trustee to appoint the examiner. In a setback for the company, the bankruptcy court appeared to set a wide scope for the contemplated investigation, and did not set specific limits on either the cost or length of the investigation, both of which were sought by the company (see “Caesars’ examiner probe to have broad scope, judge rules,” LCD, March 12, 2015 $).

The order does require the examiner to submit an interim report every 45 days, and to file a final report within 60 days of completing his investigation.

According to materials submitted to the bankruptcy court, Davis, 68, is in individual practice in New York City. From 1981 to 2012, he was a litigation partner at Weil, Gotshal & Manges, and from 1977 to 1981, during the administration of President Jimmy Carter, he was an Assistant Secretary of the Treasury for Enforcement and Operations.

Going back even further, Davis was a special prosecutor for the Watergate Special Prosecution Force, including serving as chief trial counsel in the trails of Dwight Chapin, an advisor to President Nixon, and Edward Reinecke, a former Lieutenant Governor of California. Both were convicted of perjury; Chapin served nine months in prison, while Reinecke, sentenced to 18 months, saw his conviction overturned on appeal.

A hearing on the U.S. Trustee’s emergency motion to name Davis as the examiner is scheduled for tomorrow. – Alan Zimmerman


Bankruptcy: Global Geophysical nets reorganization plan confirmation

The bankruptcy court overseeing the Chapter 11 proceedings of Global Geophysical Services on Feb. 6 confirmed the company’s reorganization plan, according to a court order entered in the case.

As reported, the company rescheduled its plan-confirmation hearing for Friday after coming to terms on $120 million in exit financing. The hearing had been adjourned to a “date to be determined” on Dec. 19, 2014.

As reported, the exit facility was less than the $150 million contemplated under the company’s proposed reorganization plan. In disclosing the terms of the financing last week to the bankruptcy court in Corpus Christie, Texas, the company also disclosed that its DIP lenders had as a result agreed to “less favorable treatment” than spelled out in the plan.

The exit facility is comprised of a $60 million first-lien term loan, a $25 million first-lien revolver, and a $35 million pay-in-kind second-lien facility (see “Global Geophysical nets exit loan of only $120M; DIP recovery nicked,” LCD, Feb. 3, 2015).

Under the less-favorable treatment agreed to by DIP lenders, holders of the DIP A term loan will receive 99% of their aggregate claims in cash, and 1% in the form of new second-lien exit debt (compared to all cash under the proposed reorganization plan), while holders of the DIP B term loan will now receive second-lien debt (compared to cash under the proposed reorganization plan) after converting $51.9-68.1 million of their claim to equity in the reorganized company, which amount will be reduced on a pro rata basis from the proceeds of a rights offering, the amount of which will correspond to the amount of the DIP that is converted to equity.

As reported, the company’s DIP facility was comprised of an initial $60 million A term loan and an additional $91.88 million B term loan that was subsequently added to resolve a battle over the DIP, with the proceeds of the B term loan going to pay off the company’s pre-petition secured lender claims (see “Global Geophysical nets court approval of upsized $151.8M DIP loan,” LCD, April 25, 2014).

The lenders under the DIP are a group of holders of the company’s 10.5% notes due 2017.

Shares under the rights offering would be offered to certain senior noteholders (those qualified as accredited investors) at $8.0887 per share, representing a 15% discount to the per share equity value based on an enterprise value of $190 million. At the maximum conversion amount, the shares (about 3.47 million) would represent 37.41% of the reorganized company, while at the minimum conversion level (about 2.85 million shares) they would represent 28.5%.

The ultimate conversion/rights offering amount would depend upon a formula tied to the company’s cash balance as of Dec. 31, with the maximum conversion amount occurring of the cash balance is less than negative $11.3 million, and the minimum conversion amount occurring of the company’s cash balance exceeds $5 million.

The company’s base case assumes a projected cash balance of negative $6 million, with 34.53% of the shares represented in the conversion amount.

Beyond participation in the rights offering, senior noteholders, with allowed claims of roughly $262.87 million, are also slated to receive a pro rata share of equity in the reorganized company ranging from 11.95-32.71%.

The projected recoveries for those noteholders eligible to participate in the rights offering range from 6.89-13.85%, while the projected recoveries for note holders not eligible for the rights offering are slightly less, or 5.01-12.65% (see “Global Geophysical reorg plan puts enterprise value at $190M,” LCD, Sept. 24, 2014). – Alan Zimmerman


Joe’s Jeans Defaults on $60M Leveraged Loan; Interest Rises to 14%

Joe’s Jeans defaulted on a $60 million term loan and will begin paying default interest of 14%, instead of 12%.

Garrison Loan Agency Service is the agent. The default, on Nov. 6, stems from the company failing to meet the minimum-EBITDA covenant for the 12 months ended Sept. 30.

As a result of the term loan default, the company defaulted on a revolving credit agreement and a factoring facility with CIT Commercial Services. The company owes $33.9 million under the RC, and has availability of $13.7 million, including the factoring facility, as of Sept. 30.

Management is in talks with Garrison and CIT over amendments and default waivers. Without a waiver, lenders could accelerate repayment, possibly triggering a bankruptcy, an SEC filing today said.

In the nine months ended Aug. 31, the company generated net income of $276 million, versus a net loss of $287 million in the same period a year earlier.

In September 2013, CIT Capital Markets and Garrison Investment Group provided $110 million in debt financing to Joe’s Jeans to back the $97.6 million acquisition of Hudson Clothing from Fireman Capital Partners, Webster Capital, and management.

The financing includes a $60 million, five-year term loan and an up to $50 million, five-year borrowing-based revolver. At syndication, the bulk of the RC was priced at L+250, while a $1 million RC-1 sliver was priced at L+350. The RC is subject to a 50 bps call in year two if Joe’s Jeans terminates the RC commitment.

At syndication the five-year term loan was priced at L+1,075 and callable at 103, 102, and 101, according to the filing. The loan is subject to fixed-charge and leverage ratios, and an EBITDA minimum.

In addition to the acquisition, proceeds funded fees and expenses, working capital and general corporate purposes. Joe’s Jeans also issued $32.4 million of convertible notes to the sellers as part of the deal.

Los Angeles-based Joe’s Jeans designs, sources and distributes branded apparel products to over 1,200 retail locations in the U.S. and abroad. The company’s shares trade on the Nasdaq under the ticker JOEZ. – Abby Latour

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Bankruptcy: Exide nets OK for its amended DIP at the cost of plan exclusivity

The bankruptcy court overseeing the Chapter 11 proceedings of Exide Technologies has approved an amended DIP facility for the company, but only on the condition that the company’s exclusivity period to file a reorganization plan be terminated.

In doing so, Bankruptcy Court Judge Kevin Carey practically dared the unsecured creditors’ committee in the case, which had objected to the amended DIP on the grounds that more favorable financing was available for the company, to file a competing reorganization plan.

“The committee can stop telling me there is something better,” Carey said, “and start showing me.”

Exclusivity had been set to expire on Dec. 10. It will now expire on Nov. 6, with Carey giving the company and its DIP lenders several days to gather the approvals necessary to further amend the facility so that the termination of exclusivity does not cause a default.

As reported, the unsecured creditors’ committee in the case had argued that the narrow milestone deadlines of the amended DIP were designed to ease the way for DIP lenders, many of which are also prepetition noteholders, to credit bid their claims to acquire the company’s most valuable assets by eliminating the potential for competing third-party bids.

Under the amended DIP, the facility would be extended through March 15, 2015, an extension the company said it needed because of several setbacks to its reorganization that occurred this summer. In connection with that maturity extension, the company set Nov. 17 as the deadline for it to enter into a reorganization plan support agreement with creditors, saying that if it failed to do so it would pursue a sale of the company.

The milestone deadlines associated with the sale option would require a signed stalking-horse agreement by Dec. 23, bankruptcy court approval of bid procedures by Jan. 15, 2015, and bankruptcy court approval of a sale by March 10, 2015.

That timeline, the unsecured creditor panel said, was too tight for a potential buyer to formulate a bid and perform due diligence on a company the size and complexity of Exide.

In arguing that the amended DIP was designed to benefit pre-petition noteholders, the creditors’ committee said the company had made “little or no effort” to pursue alternative DIP funding, despite the committee’s financial advisor providing the company with names of several potential alternative lenders.

At a hearing on the extended DIP this morning in Wilmington, Del., some of the potential alternative lenders were identified as Jefferies, Cerberus, PIMCO, and Black Rock. While all parties agreed that talks with those lenders did not advance too far, the creditors’ committee argued that was due to the company’s stalling tactics.

For its part, the company said that its current lender, JPMorgan Chase, was the only firm to actually provide it with a funding commitment, and in any event, any alternative DIP financing would have triggered a priming fight with prepetition noteholders. The company also argued that the most promising alternative offer, from Jefferies, was priced higher than the amended DIP, although the creditors’ committee countered that the pricing of the Jefferies offer was balanced with other, more favorable terms, including a longer maturity extension of one year and an extended, more realistic sale timeline.

Beyond the battle over the company’s negotiation of its DIP facility, the company’s key stakeholders disagreed over the company’s prospects for a reorganization plan as opposed to a sale process.

An attorney for an unofficial ad hoc committee of noteholders, for example, denied that the group’s objective was to position itself for a credit bid. “The UNC’s primary objective is a reorganization plan,” the attorney told Carey, adding that the group was involved in active negotiations with the company.

But lawyers for the official unsecured creditors’ committee said no such negotiations were taking place. “If there is a plan process going on,” the lawyer said, “it doesn’t include us.”

Against this backdrop, Carey approved the amended DIP based on a finding that the company had clearly met its burden under the Bankruptcy Code and business judgment rule for approval of the facility, but he added that the case itself “had reached a mile post” at which “the court must make a decision” on the process from this point forward.

“Fairness requires” that exclusivity be terminated, Carey said, so that the creditors’ committee, “if it wishes, can put its money where its mouth is.” – Alan Zimmerman