LightSquared confirmation hearing schedules set, new DIP needed

The judge overseeing LightSquared’s Chapter 11 proceedings today laid out the calendar for a number of pivotal hearings in the case over the coming weeks, including a series of confirmation hearings on multiple reorganization plans in mid-January.

In Manhattan bankruptcy court this morning, lawyers for LightSquared told Judge Shelley Chapman they would also begin a deposition of DISH Networks founder Charles Ergen on Dec. 31. The company has accused Ergen, among others, of orchestrating the fraudulent purchase of more than $1 billion in LightSquared debt. Judge Chapman will hold a pre-trial conference relating to the Ergen litigation this Friday, Jan. 3, 2014.

LightSquared filed an amended reorganization plan and disclosure statement on Dec. 24 (see “LightSquared files new plan backed by Fortress, Melody Capital,” LCD News, Dec. 27, 2013). The company will now resolicit votes on its plan, with objections due by Jan. 15. The objection deadline for competing plans filed by Ergen’s L-Band Acquisition Corporation and MAST Capital has been extended to noon on Jan. 2.

The confirmation hearing on LBAC’s plan will begin Jan. 9, to be followed by a hearing on the MAST plan. The hearing on LightSquared’s plan will begin on Jan. 21, assuming the first two confirmation hearings have been completed at that point. Much of this morning’s scheduling hearing took place in Judge Chapman’s chambers, out of public view, to protect confidentiality regarding LightSquared’s ongoing negotiations with the FCC, the lynchpin of its reorganization plan. Portions of the confirmation hearings relating to FCC talks could also be held behind closed doors, lawyers said.

LightSquared lawyer Matthew Barr told the court this morning the company will file a motion today seeking approval of new debtor-in-possession financing to support the company through its exit from Chapter 11, with a hearing on approval of the new DIP likely to take place Jan. 21, along with its confirmation. LightSquared will also shortly file a motion regarding new exit financing from JP Morgan and Credit Suisse (see “Additional details surface on LightSquared financing,” LCD News, Dec. 20, 2013). — John Bringardner


AK Steel high yield bonds gain on 4Q earnings guidance

AK steel logoBonds backing AK Steel traded higher today after the company unveiled better-than-expected guidance for its fourth-quarter results.

AK Steel 8.375% notes due 2022 changed hands at par today, compared to trades at 97-98 earlier this week. The company’s 7.625% notes due 2020 traded today at 98.75, two points higher than recent trades in size earlier this week.

Sentiment in the high-yield market was positive today, with subdued trading volumes, in the last full week of business for 2013. The unfunded HY CDX 21 index was unchanged over the day, at 107.5, according to Markit. That’s a high for this series.

AK Steel said yesterday it expects fourth-quarter net income of 2 to 6 cents per share, excluding the impact of a potential non-cash income tax benefit related to pension and other postretirement benefit gains. Wall Street was anticipating the company would report a loss for the quarter, according to press reports. Shipments are expected to rise 13% on a sequential basis, to 1.4 million tons in the fourth quarter, AK Steel said.

The West Chester, Ohio-based company produces flat-rolled carbon, stainless and electrical steels used in automotive, infrastructure and manufacturing, construction and power-generation industries.

The company sold $300 million of 8.375% notes due 2022 at par in March 2012. The company re-opened 7.625% notes due 2020 by $150 million at 99.375 in December 2010 for general corporate purposes, lifting the total issue to $550 million. – Abby Latour


Two judges retiring from SDNY bankruptcy court, replacements sought

The U.S. Bankruptcy Court for the Southern District of New York announced this week that two of its judges will retire in 2014: Judge James Peck on Jan. 31, and Judge Allan Gropper on Oct. 3.

The Second Circuit Judicial Council is currently seeking applicants to fill both judge positions. The term of office is 14 years, with a current annual salary of about $181,000. Applications must be filed by Feb. 14, 2014.

Judge Peck has been on the bench at One Bowling Green since 2006. He presided over the Lehman Brothers bankruptcy, the remainder of which will be assigned to Judge Shelley Chapman by Jan. 31. As a mediator, Peck also recently played a critical role in the Chapter 11 of Residential Capital. Prior to becoming a judge, he was a partner at Schulte Roth & Zabel.

Judge Gropper, formerly a partner at White & Case, took the bench in 2000. Among other cases, he presided over Eastman Kodak Company’s recent Chapter 11, and this month issued a scathing ruling finding that Anadarko Petroleum may be responsible for billions of dollars in environmental clean-up costs and legal liabilities for Tronox, whose bankruptcy case he oversaw. – John Bringardner


2014 HY outlook: Volume, returns expected to fall after stellar 2013

Returns and issuance of high-yield corporate bonds in 2014 are expected to fall short of this year’s stellar performance, investors and strategists say. They predict that continued market strength will open the door to more issuer-friendly terms, while the impact and timing of the Federal Reserve’s stimulus-tapering plans will be a wildcard. Worries about Europe’s credit woes and the dysfunctional U.S. government, meanwhile, have receded for the time being.

As in previous years, 2013 winds down with a forecast for lower high-yield volume in the year to come. The record issuance totals of the last two years – $345 billion in 2012 and an estimated $325 billion this year – will be tough to match, particularly with a lot of refinancing activity out of the way. Similarly, this year’s roughly 7% return (which follows a 16% return in 2012) will be challenging to repeat in an expected environment of rising interest rates.

Headwinds, not trouble

Prominent bank forecasts for U.S. high-yield issuance for 2014 range from $220-330 billion.

Due to the huge amount of refinancing completed, volume will be tilted more heavily toward M&A activity, with prospects including long-rumored mergers in the cable sector and further consolidation in the wireless space. Moreover, demand for floating-rate credit could dent demand – and therefore new-issue volume – for fixed-rate high-yield bonds.

Still, reaching even the mid-range of volume forecasts would mean a considerable amount of new issuance. Coupons certainly are likely to be more enticing amid rising rates, but robust market conditions may bring out issuer-friendly terms, higher-leverage deals, and looser debt covenants. Some issuers may turn to Europe, which would represent yet another headwind to supply.

“The improvement in the loan and European high-yield market could steal additional supply from U.S. high yield in 2014,” Citi said in a weekly research note on Nov. 22.

Syndicate bankers are likely to become more creative with structures, with changes continuing to be increasingly issuer-friendly. To that end, short call structures offset by higher-than-usual first call premiums – a feature virtually unheard of before three years ago – have become commonplace. Seven- and eight-year notes with three-year non-call periods are now popular, accounting for 28% of supply this year, according to LCD. That’s up from 20% last year and 13% during 2011, with just hints of it before that.

The short-call feature in syndication has been more or less accepted, even as other innovations of late have failed to stick, like the infamous special call for up to 10% of the issue annually at 103% of par. That feature was baked into 24 deals for $11.3 billion of supply this year, versus 23 for $8.4 billion last year and a stunning 76 for $33.3 billion in 2011, according to LCD. While the short-call feature has seen greater acceptance than the 103 call, market participants agree that it eventually will need to be tested in a difficult market.

Another structure that reappeared frequently this year was PIK-toggle notes, though only once were they part of an LBO (the 2.0 buyout of Neiman Marcus). The original buyout financing in 2005 marked the debut of the PIK-toggle structure.

Issuance of PIK-toggle notes has totaled nearly $12 billion so far this year – the highest level since the peak of the credit crisis in 2008 – but it accounted for just 4% of total supply, versus 14% in 2008.

That disregard of credit risk amid the reach for yield may be sowing the seeds for the next default cycle, but syndicate bankers say not to worry yet. The revival of PIK-toggle is marked by lower leverage, issuance by performing credits, and enhanced features such as shorter tenors and special call options or equity-clawback provisions that might flag a near-term IPO.

“We’re nowhere near the terms we saw pre-crisis,” said Richard Zogheb, co-head of capital markets origination for the Americas at Citi.

But deterioration of credit quality is well underway, with split B/CCC and CCC or NR issuance accounting for 22.6% of supply this year, up from 18.9% in 2012 and 18.1% in 2011, according to LCD.

Lucas Detor, head of investment strategy at CarVal Investors, expects an increase of issuance of lower-quality credits and also believes issuers will be bolder with regard to the use of proceeds.

“The market is ripe for dividend deals. The absolute coupon to get a CCC deal done is not that significant from a historical perspective. It’s still going to be a market where there’s an incredible search for yield. If you put a nice-enough coupon on a deal, people are going to look at it,” said Detor.

The toggle structure in recent deals is more conservative than in the previous cycle. Contingent toggling has been worked into deals, with leverage and coverage tests limiting issuers’ ability to pay in kind. The tenor of recent deals is also shorter, at five years on average, often with a one-year non-call period.

“The intention is that they’re effectively short-dated instruments. They would most likely be the first in line to be refinanced,” said Kevin Sterling, a co-head of leveraged finance at Goldman Sachs.

Take Burlington Stores. The company debuted on the NYSE this fall and will exercise the unique IPO clawback provision on its $350 million issue of 9% senior PIK toggle notes due 2018, which priced at 98 in February in support of a dividend to sponsor Bain Capital. The clawback option is available in the first year for up to 100% of the issue at 102% of par, while the bonds were bracketing 103 in the secondary market, sources said. As for the balance of the CCC/Caa2 holding-company deal, a first call option is available beginning in February, also at 102% of par, filings show.

2013 issuance

A pro forma reading on total new-issue volume for 2013 is shaping around $325 billion, which is 6% below last year’s record $345 billion. Still, this year’s figure surpassed consensus estimates from the start of the year for a roughly 15% decline in issuance volume. Of course, in the first half of the year the market had been well ahead of the record pace.

Indeed, volume over the first six months of 2011 was $173 billion, which was 15% higher than in the first half of 2012. At that point, trailing-12-month volume hit a whopping $364 billion.

However, activity was off sharply in June as the market attempted to regain its footing following May’s sell-off. Broad declines that month were initially linked to interest-rate risk amid a sell-off in U.S. Treasuries, followed by record cash withdrawals from speculative-grade-sector mutual funds and exchange-traded funds.

Debut issuance was on the rise, at 20% of deals by issuer count, versus 14% during 2012 and 2011 and as low as 4% in 2008 during the credit crisis. And in a similar vein, 144A-for-life issuance surged, accounting for 35% of supply by issuer count, versus 25% last year, just as SEC-registered transactions slipped to 15% of supply by issuer count, from 21% last year, according to LCD.

Refinancing accounted for 44% of total issuance this year, versus 50% in 2012. Among these, deals to take out existing bonds accounted for 21%, which was more or less unchanged from 22% the prior year. In contrast, bond-for-loan takeouts fell to 13%, from 18% in 2012 and 45% in 2009. The balance of 10% was marked as “general refinancing,” and was unchanged year-on-year.

M&A (including LBOs) was steady, at 23% of total supply, versus 22% last year and the same context in 2010 and 2011. Within this year’s total, LBO financing contributed just 5% and M&A the 18% balance.

As noted, projections for the coming year are scaled back for a second consecutive year, with prominent bank research pointing to roughly a low-teens decrease in issuance. Barclays is estimating less than $300 billion of new deals next year, while J.P. Morgan targets $300 billion and Bank of America estimates $220 billion. Notably, Morgan Stanley’s estimate is for an increase to $334 billion.

Returns and outlook

This year’s return of approximately 7% marks a rare appearance of the contentious “coupon return.” To be sure, such an event has occurred only three times in the 33-year history of the BofA Merrill Lynch High Yield Master II Index, according to research by Marty Fridson.

“The unfortunate consequence of such an improbable occurrence is that the strategists might wrongly conclude that their annual predictions of high-yield total return entail bona fide forecasting skill,” says Fridson (see “Coupon-clipping year won’t prove forecasting skill,” LCD News, Oct. 29, 2013).

Nonetheless, an informal seasonal survey by LCD found scaled-back predictions. The consensus is for a below-coupon return in the low single digits. That would be in line with returns of 2011 and 2007.

Several strategists are pegging 2014 returns for the high-yield asset class at 3-5%. That’s a careful prediction based on coupon-clipping and minor capital depreciation amid the rising rate environment. The highest forecasts are for a near coupon return.

“Risk/reward for U.S. high-yield credit is not overly attractive at current valuations… Absolute returns will be quite low by historical standards,” Morgan Stanley said in its 2014 Leveraged Finance Outlook. The bank forecast a 2.8% return for high-yield bonds and 4% for leveraged loans in a base-case scenario.

“Loans certainly face challenges longer term, and their upside is capped. However, we think loans can reasonably achieve a near-coupon return in 2014, and given relatively low volatility, we struggle to find a fixed-income asset class with meaningfully better risk/reward,” Morgan Stanley said. – Matt Fuller/Abby Latour


Centerbridge ends bid for LightSquared, company seeks new investors

Centerbridge Partners is no longer considering its reported $3.3 billion offer for LightSquared’s assets, a lawyer for the bankrupt company said in court this morning, but the “architecture” of the Centerbridge deal remains in place and could be taken up by other potential investors.

Shortly after it was scheduled to get underway, LightSquared LP cancelled an auction of its wireless-spectrum assets on Dec. 12 in order to pursue an alternative transaction “supported by the significant stakeholders in the Chapter 11,” the company said. Private equity firm Centerbridge reached a tentative deal to acquire the company’s assets for about $3.3 billion and the assumption of about $1.7 billion in liabilities, the Wall Street Journal reported.

The auction had been set to proceed with an opening bid from Charles Ergen’s L-Band Acquisition Corp. worth $2.2 billion. Kirkland & Ellis partner Paul Basta, a lawyer for the special committee pursuing LightSquared’s sale, told Judge Shelley Chapman this morning that Centerbridge decided not to proceed with its offer, but added that the structure of the proposed deal remains in place as the basis for discussions with other potential investors.

The proposed sale would resolve the estates of both LightSquared Inc. and LightSquared LP, and retain for existing stakeholders the rights to LightSquared’s current multibillion dollar lawsuits against members of the GPS industry and Charles Ergen, Basta said. “We are working with all parties to define any conditions to that plan of reorganization, and we are extremely active in Washington to understand the achievability of those options,” Basta added, referring to discussions with the FCC. FCC approval of LightSquared’s spectrum usage remains a wildcard, however. It was the agency’s license denial that drove the company into Chapter 11 in the first place, and in the 19 months since the bankruptcy filing the FCC has given no official indication it will reverse course.

The company also rescheduled the auction of its “One Dot Six” assets, or LightSquared Inc., from Dec. 16 to Dec. 19, subject to further potential adjournments. LightSquared Inc. is the holding company for LightSquared LP. U.S. Bank and Mast Capital Management, the company’s debtor-in-possession lenders, had previously offered to purchase LightSquared Inc. by credit bidding the roughly $62 million they are owed under the DIP.

The company will return to court on Dec. 23 for a hearing on Harbinger Capital Partners’ amended plan and disclosure statement, which contains new language that would subordinate the contested claims of Ergen’s SP Special Opportunities fund. – John Bringardner


Europe: Psigma and City Financial launch new high-yield bond fund

Psigma Investment Management and City Financial Investment Company have joined forces to launch the City Financial High Yield Opportunities fund. The new strategy has been designed and created for use by Psigma’s clients, and is seeded with roughly £35 million of assets.

The fund will be managed by John Sullivan at City Financial specifically for Psigma’s clients, and is targeting an annual return of 8%-plus.

Holdings will focus on performing, stressed, and distressed European credits, and will typically be composed of a concentrated list of 25 to 35 credits. The distressed element of the portfolio is limited to 20%.

Last year Psigma also teamed up with Twentyfour Asset Management with the launch of a short duration, buy-and-hold bond fund that is part-invested in high-yield bonds.

Psigma Investment Management was established in 2002 and had £2.1 billion of AUM, as of Oct. 31, from private clients, charities, and self-administered pension schemes. – Luke Millar


Loehmann’s to sell assets and inventory, wind up operations

Loehmann’s said it’s unable to continue as a going concern and that it plans to use its Chapter 11 filing to sell its assets and wind up operations, according to court documents.

As reported, Loehmann’s filed for Chapter 11 yesterday in bankruptcy court in Manhattan, the company’s third such filing since 1999. The company emerged from its second bankruptcy in March of 2011, with hedge fund Whipoorwill Associates as its majority owner.

The discount women’s clothing retailer said it has “faced significant financial difficulties” since that emergence, however, adding that while it sought a buyer for the company as a going concern in October and November – contacting more than 140 potential purchasers including strategic and financial buyers as well as inventory liquidation firms, 39 of which signed confidentiality agreements – it was unable to generate “any meaningful bids.”

As a result, the filing said, the company filed Chapter 11 to seek to maximize value through a sale of its leasehold interests and inventory liquidation, via either a liquidating agency agreement, an asset sale, or a combination of both.

According to court filings, the company is asking the bankruptcy court to approve bidding procedures for the asset sales and inventory liquidation on an accelerated timeline because of the company’s weak liquidity position, Loehmann’s is aiming for interim approval of the bidding procedures by tomorrow and entry of a final order approving the bidding procedures and the sales by Jan. 2, 2014.

The bidding procedures call for a bid deadline of Dec. 27 and an auction on Dec. 30, the court filings show.

The company said it is “critical” that the sales begin to close by Jan. 7, 2014, citing not only the cash drain of continuing operations on the company, but the fact that the company’s inventory is comprised primarily of winter clothing, and bidders would reduce their bids if they cannot begin to sell the clothing immediately. The company said that a two-week delay could reduce the purchase by 2%, or $1 million in value.

Last, but not least, the company is seeking approval of a joint venture comprised of SB Capital Group, Tiger Capital Group and A&G Realty Partners, to act as a stalking-horse bidder for the sale, for a purchase price of $19 million in cash, 25% of net proceeds realized in connection with the sale of certain additional assets, 75% of the net proceeds from the sale of certain consignment goods, 25% of the net proceeds from the sale of intellectual property of leases, and the assumption of certain liabilities. The agreement carries a break-up fee of $250,000, plus expenses of up to $200,000. – Alan Zimmerman



Loehmann’s files Chapter 11 for the third time

Loehmann’s filed for Chapter 11 yesterday in bankruptcy court in Manhattan, court documents show. It’s the company’s third trip to bankruptcy court, following filings in 1999 and 2010.

According to the Chapter 11 petition, the company’s assets range from $50-100 million, while estimated liabilities are between $100-500 million.

Additional details from the filing were not immediately available.

As reported, the company emerged from Chapter 11 on March 1, 2011, with a reorganization plan backstopped by a $25 million investment from distressed-investment hedge fund Whippoorwill Associates, which held 70% of the company’s secured debt, and Istithmar, the company’s equity owner at the time. Istithmar is a unit of Dubai World, which is owned by the government of Dubai, focusing on private equity, real estate, and other alternative investments.

The exit was also funded, in part, by a $35 million senior secured revolving credit facility.

According to the petition filed yesterday, Whippoorwill now owns 68.49% of the company’s common equity, and Designer Apparel Holding Company, which lists its address in Dubai, holds 19.13%.

At the time of its 2011 exit, the company said it would focus its merchandising efforts on “well-known designer brands that resonate with its frequent shoppers,” as well as “refine its advertising outreach to communicate with Loehmann’s core customers and potential new shoppers.” – Alan Zimmerman


European high yield bond funds see €166M investor cash inflow

J.P. Morgan’s weekly analysis of European high-yield funds shows a €166 million inflow for the week ended Dec. 11. This includes a €140 million net inflow for short-duration funds, and a €19 million outflow to ETFs. The reading for the week ended Dec. 4 is revised from an inflow of €270 million to a €269 million inflow. The latest reading is the fourteenth consecutive weekly inflow.

The provisional reading for November is a €1.42 billion inflow, which is the ninth month this year for which net inflows have been recorded, and the fourth to record an inflow greater than €1 billion. The largest monthly inflow was €1.8 billion in January, while the largest monthly outflow was €2.4 billion, tracked in June.

The latest estimate for total inflows this year through November is €6.76 billion, versus €6.06 billion for the comparable period last year.

High-yield primary has now closed for the year, but money continues to pour into funds – most notably short-duration funds – and this should mean the positive technical picture continues into the start of next year. Funds are now winding down for Christmas too, with secondary liquidity almost non-existent, as books close with returns in the 8-10% region for the year, according to a selection of fund managers.

In the U.S., retail cash flows to high-yield funds returned to positive territory with a net inflow of $16 million for the week ended Dec. 11, according to Lipper, a division of Thomson Reuters. An inflow of $108 million to mutual funds outweighed an outflow of $92 million from exchange-traded funds. The net inflow, however, barely dents the week prior’s $141 million outflow, which broke a streak of three straight positive readings. Inflows total $2.6 billion for the year to date, with ETF inflows comprising 73% of the total, at $1.9 billion.

Meanwhile, retail cash inflows to bank loan mutual funds and exchange-traded funds totalled just $462 million for the week ended Dec. 11, according to Lipper. That is the third-smallest inflow of the year. Year-to-date inflows total $51.1 billion, of which 10% is tied to ETFs.

As reported, J.P. Morgan only calculates flows for funds that publish daily or weekly updates of their net asset value and total fund assets. As a result, J.P. Morgan’s weekly analysis looks at around 50 funds, with total assets under management of €10 billion. Its monthly analysis takes in a larger universe of 90 funds, with €27 billion of assets under management. For a full analysis, please see “Europe receives HY fund flow calculation.” – Luke Millar


Sixt challenges Advantage Rent-A-Car auction result, requests its bid selected as winner

Sixt SE objected Thursday to the results of a “purported auction” that would transfer Advantage Rent-A-Car’s assets to its DIP facility lender, Catalyst Capital Group, in exchange for a $46 million credit bid.

The auction process was conducted in bad faith and should be redone, Sixt says. The German car-rental company withdrew from the original auction at the last minute after discovering it had been denied access to crucial information regarding Advantage, but offered to participate in a new auction “as long as it can be assured of a fair opportunity to participate on an equal footing with Catalyst.”

A sale hearing on Catalyst’s bid is currently scheduled for Dec. 17, in Jackson, Miss.

Advantage, identified in court filings as Simply Wheelz LLC, selected Sixt as the stalking-horse bidder for its Dec. 9 auction, replacing an initial stalking-horse offer from Catalyst, a Canadian investment firm.

Catalyst challenged the Sixt bid, however, claiming it resulted in a default under the DIP. Catalyst’s threat to terminate funding under the DIP just ahead of the auction “was nothing more than a pretext to gain an unfair advantage in the auction,” Sixt says.

Catalyst’s winning bid was $500,001 less than Sixt’s offer, but the firm offered, “in essence, to simply withdraw its notices of default, together with a few inconsequential changes to its asset purchase agreement,” Sixt claims. Catalyst also offered fleet financing, which was a canard because the firm knew that a forthcoming settlement with Hertz meant a new vehicle leasing plan was not likely to be needed, Sixt alleges.

Just after the auction, Advantage announced a settlement with Hertz under which Advantage could continue to use its vehicles. Hertz also agreed to pay Catalyst $2.75 million after the close of the sale, and Catalyst has the option to purchase the leased vehicles.

Advantage filed for Chapter 11 protection on Nov. 6 after lease payment negotiations with Hertz collapsed. Hertz was required to divest the Advantage business earlier this year as part of its $2.3 billion acquisition of Dollar Thrifty Automotive Group.

Catalyst’s winning bid was invalid, Sixt claims, part of a process designed to keep Sixt in the dark regarding Advantage’s true financial status. As such, Sixt is asking the court to set the auction results aside and select Sixt’s overbid as the highest and best bid at the sale hearing. – John Bringardner