Bankruptcy: Samson Resources Says Contemplated Restructuring no Longer Feasible

Samson Resources said that certain key aspects of its restructuring previously agreed to with a group of second-lien lenders “are likely no longer feasible,” adding that while the company has been considering reorganization alternatives, “any new restructuring would likely provide significantly less value for stakeholders” than the company’s initial deal.

In a Dec. 17 motion filed with the bankruptcy court in Wilmington, Del., seeking to extend the company’s exclusive periods, respectively, to file and solicit votes to a reorganization plan, the company attributed its inability to move ahead with its initial restructuring transaction primarily to the “continued and very significant decline in the prices of natural gas and oil.”

More specifically, the aspects of the restructuring that the company said were no longer feasible include the potential market refinancing of the company’s first-lien RBL facility, a commitment for a new money investment from second-lien lenders at the size previously contemplated, and anticipated recoveries to certain creditors.

The company said, however, “Notwithstanding these challenges, the debtors continue to believe that a reorganization maximizes value and, to that end, are working diligently to overcome these hurdles,” citing, among other things, the stabilization of the company’s business, the hiring of a chief restructuring officer, and cost management in response to changing market conditions.

Previously, company attorneys had warned in court hearings that the pre-arranged deal the company had in hand when filing Chapter 11 was in jeopardy (see “Samson revolver, term loan drop amid bankruptcy woes,” LCD News, Nov. 2, 2015).

The company asked the bankruptcy court for a nine-month extension of its exclusive period to file a reorganization plan, through Oct. 14, 2016, and of its exclusive period to solicit acceptances to a plan, through Dec. 14, 2016, “to provide them time to further analyze, develop, and negotiate restructuring alternatives and shape those alternatives toward a value-maximizing resolution,” saying the additional exclusivity was “critical” to the company’s ability to achieve a “value-maximizing transaction.”

In the meantime, the company said, it has “held and continues to hold multiple discussions with stakeholders, including the debtors’ second-lien lenders, the debtors’ first-lien lenders, and the creditors’ committee.”

As reported, the company filed for Chapter 11 on Sept. 16 with a restructuring support agreement backed by 68% of the company’s second-lien lenders, as well as equity owner KKR (see “Samson files Ch. 11 with RSA in hand, but noteholder challenge looms,” LCD News, Sept. 17, 2015).

Under the terms of the reorganization contemplated by the RSA, a group of second-lien lenders, including Silver Point, Cerberus, and Anschutz, agreed to backstop a rights offering to second-lien lenders contemplating $413.25 million in new equity and $36.75 million in new second-lien debt. The rights offering’s proceeds would then be used to pay down the company’s existing reserve-based revolver to $650 million.

Second-lien lenders were then to have received all remaining equity in the reorganized company not otherwise issued under the plan, namely, equity issued via the rights offering, the management and board incentive program (10%), or to unsecured noteholders (slated to receive 1% of the reorganized equity of the vote to accept the plan, 0.5% if they vote to reject it).

First-lien lenders under the company’s revolving credit agreement, meanwhile, were to have seen either payment in full via a refinancing of the facility, or the amendment and reinstatement of the facility in whole or in part, in which case holders would receive a combination of cash and new debt.

As also reported, the company had also considered, but rejected in favor of the second-lien lender proposal, an alternative proposal from a group holding more than 50% of the company’s unsecured notes that contemplated an exchange, at a discount, of all of the company’s senior unsecured notes for new secured notes and a new money investment of $650 million. Under the noteholder-led proposal, both the exchanged existing notes and the new money investment would be invested on a priming basis ahead of the second-lien term loan obligations.

According to court filings, the noteholder proposal initially contemplated an exchange at 60% of the aggregate outstanding notes, although the final proposal reduced the exchange to 20%. Even at that rate, however, the transaction would have left the company with about $3 billion of indebtedness.

The unsecured noteholder group included Centerbridge, Franklin Resources, Oaktree, and Pentwater.

The company explained in September that it rejected the noteholder proposal because of declines in the energy market, the softening of credit markets, and the company’s inability to refinance its first-lien debt in the context of the transaction.

The company also said that the noteholder proposal required an additional investment from the company’s equity sponsors that they were unwilling to make in light of the commodity price environment, among other things. — Alan Zimmerman

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2016 High Yield Bond Market Outlook: Predictions Mixed, With a Wary Eye on Commodities

In the wake of this year’s bruising decline of roughly 5% for high-yield bonds, estimates for high-yield bond returns in 2016 range from a loss of 3% to a gain of 6%, according to an annual, informal survey from LCD. More troubles in Energy and Mining, as well as the potential development of a U.S.-led economic downturn, will likely weigh on returns next year, market observers say.

Single-digit returns are unusual for the high-yield market—double-digit swings in either direction are more common. Matt Freund, senior vice president of portfolio management at USAA Investment Management, expanded on the lackluster returns. “Tremendous defaults are coming in high-yield energy, but we think that’s already reflected in current pricing. But if [the defaults] spread to pipelines, services, etc., it would catch the market by surprise,” Freund said. Freund also noted that other wildcards that could trigger a bigger move include a policy mistake by the Federal Reserve or a recession. However, neither of those scenarios are USAA’s official view.

Returns in 2015 through Dec. 14 are negative 5.15%down from negative 1.44% just two weeks ago amid this month’s rapid deterioration. There hasn’t been a negative annual return since the supersized loss of 23.4% in 2008 amid the credit crunch, according to the S&P U.S. High Yield Corporate Bond Index (SPUSCHY). The current reading is a 7.79% delta to last year’s positive 2.65% return and missed all Street estimates for “below-coupon” returns ranging from positive 2.5–6.5%.

Looking ahead, prominent bank forecasts range marginally on either side of the unchanged mark, from both negative to positive in the low- to mid-single digits. On the downside, albeit barely, Deutsche Bank projects a negative 1% return. Bank of America is the most pessimistic, at negative 2–3%.

“Global weakness, improving fundamentals, and cheap valuations [are] good catalysts for [investment-grade] credit, we actually think all three of those factors are to the detriment of high yield in 2016,” according to Michael Contopoulos, head of high-yield and leveraged loan strategy at Bank of America Merrill Lynch.

On the upside, Credit Suisse forecasts returns of positive 6% next year; J.P. Morgan projects 5–6%; Morgan Stanley lays out 5.1%; and Barclays predicts returns of 4–5%, according to the LCD survey. RBS forecasts a positive 0.4% return.

“If it becomes clear that the business cycle is not facing an imminent recession in developed markets, we think spreads should rally modestly, helped by accommodative central banks outside the U.S.,” offered Barclays strategists in the annual outlook.
US HY bond returns

Last year’s wildcards proved disruptive. The bear-market mauling in the oil patch worsened. Additionally, the historically loose monetary policy didn’t end as expected, as several weaker economic data prints kept the Fed on hold with rate-hike lift-off until December, as compared to expectations of March 2015 at this point last year. As with last year, market participants don’t expect tighter monetary policy to roil high-yield, assuming it’s at a measured pace.

Regarding interest rates, most prognosticators in recent years have jumped the gun in predicting a bear market for U.S. Treasury notes. Respondents to last year’s informal annual survey by LCD projected the yield on the 10-year Treasury note to be from mid-2% to just under 3%. It now sits below that range, around 2.25%, the same as a year ago, albeit at the higher end of the 2015 range from approximately 1.65% in January to 2.5% in June.

Looking ahead, forecasts are again for a context of nearly 3%. RBS projects 2.85%, and Credit Suisse 2.95%. One standout is Deutsche Bank, which lays out flat 10-year yields for 2016.

This year, higher-quality BB paper was a safe haven, essentially unchanged against the broad market downdraft, but how would notes fare in the long-forecast rising-rates environment? Certainly low-coupon paper is sensitive—think Ball Corp. 4% notes due 2023 and Constellation Brands 4.25% notes due 2023—but investors see plenty of room for compression.

“There is a pretty good cushion to rising rates for BBs averaging about 6%,” offered Freund.

To that end, the BB tier within SPUSCHY as of Dec. 14 offers an average yield of 6.38%, up from 5.61% two weeks ago, and an average option-adjusted spread of T+466, up from T+398 two weeks ago, versus 4.91% and T+332 at the end of 2015.

Bankers relay ongoing concerns about the regulatory environment put in place nearly three years ago, and that the tighter restrictions may continue to reduce leveraged-deal making, as they did in 2015. There was about $8.6 billion in buyout-related high-yield issuance this past year, for roughly 3% of supply, down from about 4% of supply last year and nearly 6% of supply three years ago.

In contrast, there was $90.3 billion of corporate M&A issuance this past year, for approximately one-third of annual output, down from about 29% of supply last year and 16% dating back three years, according to LCD. Moreover, the shadow calendar for high-yield is roughly $23 billion, with just 13% of the sum LBO-related, and the balance M&A.

Greater high-yield issuance is forecast for the year to come, as well as an expansion of the non-investment-grade space due to fallen-angel downgrades in the commodities sectors tempered modestly by the elimination of debt with commodities bankruptcies. Mining giant Teck Resources this past month, for example, brought $4 billion of supply to the high-yield market after its downgrade to BB, from BBB–, and it now represents 0.24% of the SPUSCHY. (The transitions from investment-grade to high-yield indexes occurred in November.)

Away from fallen angel supply, prominent bank forecasts for U.S. high-yield new issuance in 2016 range from $200–300 billion. This compares to a pro forma domestic and Yankee speculative-grade corporate supply of $263 billion for 2015, which is at the lower end of the $260–340 billion consensus forecast range put forth one year ago, according to the LCD survey.

Among the forecasts are a steady-as-we-go $275 billion out of J.P. Morgan and an unchanged-to-higher prediction of $270–290 billion out of Barclays. A few outliers in the informal survey include Morgan Stanley, which put forth an estimate for a roughly 10% increase, to $296 billion; Wells Fargo, which for a second year is calling for roughly a 25% slowdown, to a $225 billion context; and both Bank of America and Deutsche Bank, which are pegging less, at $196 billion and $210 billion, respectively. Of note, Credit Suisse, which this year essentially nailed the number, at $260 billion, opted against a follow-up forecast.

Looking ahead, the shadow calendar was whittled down this past month with the big Charter Communications and Constellation Brands M&A deals done and dusted. With those and a few other smaller offerings cleared from the backlog of business, pro forma volume on the shadow calendar contracted to roughly $23 billion. Some of the names recently added include a $1.05 billion TreeHouse FoodsM&A bridge to bonds, $1.8 billion backing the Solera/Audatex buyout, and $2.3 billion backing the Veritas buyout, even as the loan effort was postponed last month due to market conditions.

high yield issuance, returns

The crux of commodities 
By all accounts, commodities will headline 2016, barring exogenous shocks and geopolitical turmoil. Whether the view is to avoid the trouble in the oil patch and mining, or scour these spots for opportunities, it’s a hard part of the market to avoid. Indeed, these sectors represent 18.62% of the SPUSCHY: 15.90% Energy, 1.40% Mining/Metals, and 1.32% Steel.

Investors are positioning for continued low oil prices after this year’s plunge in prices surpassed even the worst bear-market scenarios. Prominent forecasts are for at least another year of oversupply in the sector. The lack of policy adjustment out of OPEC fans the flames.

As for the disruptive effects of the advent shale-drilling technologies, the question is “How long can this strategy go on for OPEC?” says Jon Adams, senior investment strategist for BMO Global Asset Management.

“Our case is that the sell-off in August and September was more sentiment-driven, and less fundamentals-driven, so we see some attractive value for the medium term. It’s been a difficult few weeks here as high-yield diverged from equities, but the implied default rate of 7–8% ex-Energy is implying a recession, and in our view we are only mid-cycle,” furthered Adams.

Credit analysis has therefore turned to separating the “haves” and “have nots” by production region, costs, and margins, as well as evaluation of the infected services providers, and credits across Metals and Mining sectors.

“As the cycle bottoms, you have to look at the high quality and low cost producers. Those are the ones that are going to attract attention. The problem is that they are not necessarily high-yield. They are the low-cost investment-grade natural gas plays,” according to USAA’s Freund.

“[In high-yield Energy] you are going to go through a long period of defaults and consolidation, but the big integrated oil companies and private equity will wait for oil to bottom, and that’s not going to happen right away,” Freund added.

Away from M&A in the space, issuers will find solace in the courtrooms and through sideskirting bankruptcies through privately negotiated exchanges. Many were completed this year, including uptier swaps from the likes of American Energy – WoodfordMidstates PetroleumVenocoWarren Resources, and Linn Energy, and debt-for-equity exchanges for Halcon Resources and SandRidge Energy.

As for these efforts and their efficacies, USAA’s Freund says: “We view them bond by bond and company by company. We have participated in some, and not in some. Being more cautious about our allocations has helped.”

Two late-year marquee transactions were the uptier exchanges from California Resources and Chesapeake Energy. The former’s was greatly oversubscribed, with $3.653 billion of its three series of senior notes totaling $5 billion put in for the deal. Unfortunately for investors, it leaves an approximate 56% balance of each series’ less widely held, less liquid, essentially “stub” paper that is subordinated to the new issue. As such, all three are wallowing in the high 30s, down from the low 60s after the effort launched to market in mid-November, and the low 70s prior, trade data show.

Chesapeake’s long-awaited plan for an uptier of its deeply distressed unsecured bond issues into an up-to-$1.5 billion new issue of 8% second-lien notes launched Dec. 3, and early participation is due at 5 p.m. EST today, Dec. 15. The overarching transaction, which has been rumored for weeks as bonds plunged to record lows and peers launched similar exchanges, is the largest of its kind by tranching, covering 10 series of Chesapeake Energy senior notes, including one euro-denominated series and a floating-rate note. It’s based on a six-tier priority scale, with consideration ranging from a par-equivalent swap for the tier-one euro notes, down to as low as a $565 per-bond equivalent for the 4.875% notes due 2022 in a four-bond, tier-six grouping, according to a company statement. Even so, those 4.875% notes have plunged this month amid the sell-off, with recent quotes of 25/27, sources said.

The way forward

Looking ahead, clearly the focus is avoiding the commodities crunch, and the BB trade is getting a little crowded. Away from the Chicken Little reports in the broadsheets circulating of late—high-yield is signaling recession, high-yield is portending a sell-off in equities, Energy bonds are the new subprime—seasoned market professionals see value in the marketplace, if not strong opportunities.

“We see opportunities in the first quarter to pick up on non-energy sectors that have repriced, and credits that have cheapened, but you have to be actively managed. You don’t have to traffic in the dicier sectors, which will be trouble for years to come,” according to Art DeGaetano, chief investment officer of Bramshill Investments.

“We are dramatically underweight energy in terms of E&P, but tremendously overweight in pipeline. There are opportunities in crossover BB and BBs and fallen angels,” confers USAA’s Freund.

“We are modestly overweight high-yield across our portfolio strategies since early October. Our view is that the sell-off in August and September was more sentiment-driven, and less fundamentals-driven, so we see some attractive value for the medium term,” explained BMO’s Adams.

“One thing is for sure, junk bonds will exist after this period of media-induced fear and regulatory liquidity constraints. It’s never pleasant for those caught offsides, but rest assured that those investors with patience and capital can earn better-than-equity-like returns if they remain rational in their approach to the opportunities,” summarized a veteran salesperson who wished to remain anonymous.

The U.S. trailing-12-month speculative-grade corporate default rate ticked up to 2.8% in November, from 2.7% in October and 2.5% in September, according to S&P Global Fixed Income Research (S&P GFIR). The current observation is the highest reading since it was equally 2.8% in October 2013. At the same time, the S&P U.S. distress ratio increased to 20.1% in November, from 19.1% in October. It’s at the highest level since it hit 23.5% in September 2009 amid the financial crisis.

The S&P GFIR forecast for the U.S. speculative-grade default rate is for a modest increase, to 3.3%, by September 2016. In contrast, prominent bank forecasts are mostly higher. J.P. Morgan is under that context on average, at 3%, but then breaks out at 10% as a standalone default rate for the Energy sector. Credit Suisse is a bit lower, at 2.5–4%, and RBS is modestly higher, at 4.6%.

Barclays is forecasting a 5–5.5% default rate, with a range of just 4.4% if oil prices rise to $60 per barrel or more, and to 6.4% if oil sinks below $40 per barrel.

default rate, loans v bonds

Certainly defaults loom in the sector, as well as in Metals & Mining, but note that the LCD restructuring watchlist has many other names. Retailers Bon-Ton Department StoresClaire’s StoresElizabeth ArdenGymboreeJ. Crew Group, and restaurants company Logan’s Roadhouse line the docket. Back in commodities, Arch Coal is the most pressing, as it skipped the large, multi-series coupon payments due today, Dec. 15.

Meanwhile, LCD’s shadow default rate—a measure of performing S&P/LSTA Index issuers that have (1) missed a bond payment, (2) entered a forbearance agreement, or (3) hired bankruptcy counsel—has climbed to 1%, from 0.84% as at the end of October. By amount, $8.54 billion of Index outstandings are on the shadow list. The publicly known loan issuers are Arch Coal, Gymboree, Millennium Health,R.H. Donnelley/SuperMedia/Dex MediaParagon OffshorePeabody Energy, and recent addition Verso/NewPage. — Matt Fuller

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

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US High Yield Bond Issuance at 4-Year Low as Market Licks Wounds, Eyes 2016

US high yield bond issuance.JPG

With only a handful of business days remaining on the calendar and a battered market happy to hit the reset button for the year, high yield bond issuance in the U.S. looks to total $262 billion in 2015, a roughly 16% drop from the $310 billion recorded in 2014, according to S&P Capital IQ LCD.

The annual figure is the smallest amount since the $218 billion recorded in 2011.

What type of issuance can market players expect in 2016?

“Prominent bank forecasts for U.S. high-yield new issuance in 2016 range from $200–300 billion,” says LCD’s Matt Fuller. “This compares to a pro forma domestic and Yankee speculative-grade corporate supply of $262 billion for 2015, which is at the lower end of the $260–340 billion consensus forecast range put forth one year ago.” Staff reports

Check out the full 2016 High Yield Market Outlook. It’s free. 

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European High Yield Funds See €156M Investor Cash Withdrawal

J.P. Morgan’s weekly analysis of European high-yield funds shows a €156 million outflow for the week ended Dec. 16. The reading includes a €230 million outflow from ETFs, and a €31 million net outflow for short duration funds. The reading for the week ended Dec. 9 is revised from a €151 million outflow to a €132 million outflow.

The provisional reading for November is a €2.27 billion inflow, making it the second largest of the year after March’s €3.1 billion influx. October’s €1.6 billion inflow brought to an end a period of four consecutive monthly outflows, with September losing €879 million, August €1.1 billion (the largest outflow on record), and July and June having recorded €260 million and €702 million outflows, respectively.

Inflows for 2015 through November are €9.91 billion, versus full-year inflows of €4.15 billion and €8.94 billion in 2014 and 2013, respectively.

The latest reading is the second consecutive outflow, after a sustained period of inflows, by the weekly reporters. The outflows followed the ECB’s decision to not raise its monthly asset purchase programme by as much as the market had been hoping, which led to prices falling across secondary earlier this month. This softness was exacerbated by a sell-off across equities and risk assets in general, which in turn were hit by a tumbling oil price. Moreover, primary activity looks set to be over for the year – all of which offers little impetus for players to keep investing into high-yield funds.

U.S. high-yield funds saw a net $3.8 billion retail-cash outflow in the week ended Dec. 16, according to Lipper. This was the largest one-week redemption since the record $7.1 billion withdrawal 71 weeks ago (the week ended Aug. 6, 2014). The impact was fairly heavy on the ETF segment, with $2.4 billion of mutual fund outflows expanded upon by $1.4 billion of ETF withdrawals. The full-year reading also falls deeper into the red, at negative $5.9 billion, with an inverse measurement to ETFs. Indeed, the full-year reading is negative $6.7 billion for mutual funds against positive $791 million for ETFs, for an inverse 13% reading. Last year, after 49 weeks, it was squarely negative, at $4.9 billion of outflows, with 16% ETF-related.

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 55 funds, with total assets under management of €38 billion. Its monthly analysis takes in a larger universe of 100 funds, with €52 billion of assets under management. For a full analysis, please see “Europe receives HY fund flow calculation.” on LCD News (subscriber link) — Oliver Smiddy/Luke Millar

Follow Oliver and Luke on Twitter for European high yield market news and analysis. 


Avon Products Bonds Soar in Secondary, CDS Costs Plummet on Word of Cerberus Investments

Bonds backing Avon Products soared and credit protection referencing the company collapsed on news that Cerberus Capital Management is making a $605 million equity investment in the cosmetics giant and that it would suspend its common-share dividend. The 6.75% notes due 2023 traded up 10 points, although only in small lots, at 73.25, and the 4.60% notes due 2020 also printed in odd lots, at 84, versus 73, trade data show.

Five-year CDS in the name imploded, tightening 41%, to 8.8/10.8 points upfront, according to Markit. That’s essentially $700,000 cheaper, at a $980,000 upfront payment, in addition to the $500,000 annual payment, to protect $10 million of Avon corporate bonds.

Under terms of the deal, Cerberus will make a $435 million investment in Avon Products in the form of convertible perpetual preferred stock with a conversion price of $5 per share and a dividend that accrues, or is payable in common shares or cash, at a rate of 5% per annum, according to a company statement. This equates to an ownership interest of approximately 16.6% as of Dec. 16, the filing showed.

Avon North America will be separated from Avon Products into a privately held company majority-owned and managed by Cerberus. Cerberus will purchase an 80.1% interest in Avon North America in exchange for a $170 million equity investment, and Avon North America will also assume approximately $230 million of long-term liabilities from Avon Products, according to the company.

As part the strategy, Avon additionally today announced plans to suspend its common-share dividend, effective in the first quarter next year. Proceeds from the Cerberus investment and savings from the canceled dividend will be used to partially offset the transferred liabilities, opportunistically reduce debt, and fund restructuring and reinvestment in the business, according to the company.

Avon shares traded up 16% out of the gate this morning on the news, but soon settled with roughly a 3% gain, to $4.20 per.

Today’s news closes the loop on press reports earlier this fall that Avon was negotiating to sell a stake with a number of private equity firms. According to the report by the Wall Street Journal, which cites unnamed sources, Avon was talking with Cerberus and Platinum Equity.

As reported, Avon Products recently amended its revolving credit facility to $400 million from $1 billion, and extended the maturity to 2020 from 2017, according to S&P, and secured greater flexibility under its financial covenants, which include maximum leverage and minimum interest coverage ratios, to provide more headroom. — Matthew Fuller

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Colt Defense Reorg Plan Confirmed; Chapter 11 Exit Seen By Year-End

The bankruptcy court overseeing the Chapter 11 proceedings of Colt Defense yesterday confirmed the company’s reorganization plan, the company announced.

The company expects to emerge from Chapter 11 by the end of the year, according to a spokesperson.

As reported, among other things, the proposed plan provides for the company’s senior noteholders to exchange their claims for 100% of the company’s Class B LLC units or, if holders elect, new unsecured debt.

But the plan’s more significant value for creditors lies in a contemplated $50 million private offering to the company’s equity sponsor, Sciens Capital Management, and certain senior noteholders, comprising third-lien secured debt and 100% of new Class A LLC units (which would carry certain payment and other preferences over the Class B units).

Sciens would see $15 million of the offering, while another $15 million of the offering would be to two specific institutional holders of the company’s debt (Fidelity National Financial and Newport Financial Advisors) and the remaining $20 million would be available on a pro rata basis for other senior noteholders who are “accredited investors” and who hold more than $100,000 of the senior notes.

Retail noteholders that are not permitted to participate in the rights offering, assuming they voted in favor of the plan, have the option to receive either a 7% cash payment on their allowed claims or a fourth-lien note, bearing interest at 8%, in an amount equal to 10% of their allowed claim (non-participating noteholders that vote to reject the plan would revert to the distribution of a pro rata share of Class B LLC units).

According to the company’s disclosure statement, the institutional noteholders participating in the rights offering, with claims totaling $160.4 million, will see a recovery in a range of 4–15%, while the retail noteholders, with claims estimated at about $102 million, will see a recovery of 9%.

The reorganization plan also “secures options for the company to continue operations in West Hartford, Connecticut on a long-term basis.”

As reported, the West Hartford facility had become a weapon in the Chapter 11 proceedings. The owner/landlord of the facility is an affiliate of Sciens, and the company’s unsecured noteholders had alleged that Sciens was, in effect, using its influence as landlord of the facility and threatening not to renew the company’s lease—which is critical to the company’s operations—to secure a better deal for itself in the reorganization negotiations.

Under the plan, the company now has the option to purchase the facility from the Sciens affiliate, at a purchase price of $13 million in cash plus 7.5% of the new Class A LLC units.

If the company does not exercise the purchase option, it would enter into a long-term lease for the West Hartford facility at the terms set forth in the proposed reorganization plan. — Alan Zimmerman

A collection of all news stories and debt issues for Colt Defense can be found here (for LCD News subscribers).


2016 European High-Yield Bond Outlook: Market Growth Spurt Looks Over

european high yield bond volume

After a period of rapid growth for the European  high-yield bond market – which saw volumes rise every year between 2011 and 2014 – issuance declined by 10% year-on-year in 2015, with the deal count down 21%.

A similar outcome is expected for 2016, with a consensus for a fall in volume of roughly 5% from 2015’s tally, which according to LCD stands at €64.3 billion in the year to date.

That is not say European high-yield has lost its lustre, but the signs are that it has come of age, and the growth spurt is over. Between 2011–14 there were 286 bonds issued by debut credits, accounting for 46% of the total bond count, according to LCD. This year there were only 34 such deals, accounting for 22% of the total.

2015 started very strongly as the onset of quantitative easing saw accounts awash with cash, while investment-grade accounts were keenly sourcing assets in the double-B space as yields tightened in their more normal hunting ground. Consequently, up until May there were predictions that records would be smashed again — but then a stream of macro developments soured market conditions. –Luke Millar

Follow Luke on Twitter for news and insight on the European leveraged finance market.

This story first appeared on LCD News. It also detailed 

  • Use of proceeds
  • Reverse Yankee bond issuance

Distressed Debt: Chesapeake Energy Doubles Bond-Uptier Exchange Deal

Chesapeake Energy this morning announced an expansion of its bond-uptier exchange offer to $3 billion, from $1.5 billion at launch two weeks ago, as well as an extension of the early participation deadline by three days, to 5 p.m. EST on Dec. 18, according to a company statement. It’s potentially being made to encourage short-tenor participation, which has lagged longer tenors, but clearly it’s also oversubscribed, sources noted.

The overarching transaction, which was rumored for weeks as bonds plunged to record lows and peers launched similar exchanges, is the largest of its kind by tranching, covering 10 series of Chesapeake senior notes, including one euro-denominated series and a floating-rate note. It’s based on a six-tier priority scale, with consideration ranging from a par-equivalent swap for the tier-one euro notes, down to as low as a $565 per-bond equivalent for the 4.875% notes due 2022 in a four-bond, tier-six grouping, according to a company statement.

Participation was robust as of last night’s initial early deadline, at $2.79 billion, or roughly 30% of the $9.31 billion across 10 tranches, the filing showed. However, it was heavily weighted towards the longer-dated series, which are at the low end of the priority scale, versus the company’s obvious target for the short-tenor tranches.

Indeed, at the first tier, just about 10% of the euro-series of 6.25% notes due 2017 was submitted, while just 19% of the 7.25% notes due 2018 was put in for consideration. Scanning down the scale, participation grew along the yield curve and reached as much as 40% of the 5.75% notes due 2023 and 44% of the 4.875% notes due 2022, the filing showed. Further details are available online at Chesapeake’s website.

All of the issues are deeply distressed and significantly underwater to consideration under the exchange. Examples include the euro-denominated notes are in a mid-60 context; the 6.5% notes due 2017 are in the mid-50s; and the longer-dated series are around 30, according to sources. Recall that valuations were in the mid-80s, the low 80s, and the mid-40s, respectively, when the deal launched to market. (See “Chesapeake Energy bonds whipsaw on up-to-$1.5B uptier bond exchange,” $ LCD News, Dec. 3, 2015.)

Given consideration for the short-dated paper is par in the case of the euros, and near par for others, the market valuation suggests that the new issue will be discounted to par. “In our view, we think this indicates a belief by owners of the 2017–2018 notes that CHK will have the cash to make them whole or market dynamics will change and a better alternative will emerge,” according to a report out of KDP Investment Advisors.

As reported, the Chesapeake yield curve has been steepening over the past month as bonds plunged in super-heavy trading, with market sources divided over whether investors are capitulating on the credit, or fast-money shorts are taking advantage of the situation (see “Chesapeake Energy yield curve steepens as bonds plunge; CDS at wides,” $ LCD News, Nov. 19, 2015), and credit protection eventually pushed wider since the article.

Additionally, Chesapeake today announced that it amended its senior RC due 2019 to permit incurrence of up to $4 billion secured by junior liens, and possibly more according to certain clauses, to help facilitate the upsized exchange offering, the filing showed. Take note that today’s announcement by the company follows engagement of Evercore Partners as restructuring advisor, according to a report Dec. 14 by Dow Jones. — Matt Fuller

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

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Fridson on the Third Avenue Affair: The Difference Between Distressed Debt and High Yield

The shutdown of the distressed debt fund known as Third Avenue Focused Credit (TAFC), announced on the management company’s website on Dec. 9, has understandably created anxiety among retail investors. Until now, they have assumed that they could always get their money out the day they decided to.

With no warning, Third Avenue locked investors into its fund for a period it said might be up to one year or more by putting its assets into a liquidating trust. The company did not even bother to seek Securities and Exchange Commission approval for its action.

martin fridson

There are valid concerns about high-yield market conditions, highlighted by poor secondary market liquidity and the fact that the low point in the default-rate cycle is behind us. It would be a mistake, however, for investors to conclude that open-end mutual funds holding conventional high-yield bond portfolios are all at risk of being unable to meet redemptions and therefore pose a danger of a TAFC-like liquidation. Investors must understand the difference between distressed debt and ordinary high-yield bonds.

Currently, the BofA Merrill Lynch US High Yield Distressed Index accounts for just 11.62% of the market value of the BofA Merrill Lynch US High Yield Index. It has an option-adjusted spread (OAS) of 22.41%, and investors should expect about 30% of its issues to default within the next 12 months. The 88.38% of the high-yield universe represented by the BofA Merrill Lynch US High Yield Non-Distressed Index has an OAS of 508 bps. Over the next 12 months, the default rate for bonds currently in this index should be close to zero, as it is rare for the market to fail to identify bonds at high risk of default at least one year in advance.

Ownership of distressed bonds (those quoted at option-adjusted spreads of 1,000 bps or more) by ordinary high-yield mutual funds is usually inadvertent. The funds sometimes buy seemingly healthy credits that unexpectedly go bad. Occasionally, they decide not to sell, thinking the troubled issuer will turn around, only to wind up holding a defaulted bond. They do not, as a rule, deliberately play in defaulted debt, as was Third Avenue Focused Credit’s practice, as that paper generally provides no current yield.

Neither do conventional high-yield funds concentrate their holdings to the extent that TAFC did, with 28.4% of its assets in its top 10 positions. As a result, mainstream high-yield funds do not put themselves in a position of being unable to satisfy redemptions when default rates inevitably reach the point in the cycle where they stop going down and start going up.

Notwithstanding the stark dissimilarities between TACF, a distressed fund offering daily liquidity, and conventional high-yield funds, the search for the next domino to fall began soon after TAFC’s shutdown. Over the weekend the Wall Street Journal published a table entitled, “Throwing Out the Junk”.

It presented the 10 funds classified as high-yield under SEC rules, including Third Avenue’s distressed debt fund, with the largest year-to-date net outflows, ranked by the percentage of assets that those outflows represented. TAFC topped the list at 41%. The next three funds had net outflows ranging from 39% to 29%.

The four funds shared one characteristic that could contribute to an inability to meet redemptions, namely, very large requests for redemption. TAFC, however, was an outlier in terms of another key characteristic—humongous exposure to the sort of paper that is hardest to sell in order to meet redemptions. Based on Bloomberg data, 75.60% of TAFC’s market value was represented by bonds rated CCC to D or non-rated. The comparable figures for the other three funds ranged from 14.67% to 25.67%.

High-yield mutual fund shareholders should certainly take a close look at this simple metric for their own funds. Given that 63% of CCC-C issues within the BofA Merrill Lynch US High Yield Index are currently quoted at distressed levels, a ratio approaching TAFC’s would be a strong indication that the fund is in reality a distressed debt player, regardless of how it is classified by SEC rules.

In the present environment, that sort of fund could well find itself unable to continue offering daily liquidity. Conventional high-yield funds should not find themselves in that position, even though they may take sizable hits when they sell bonds to raise cash for redemptions. – Martin Fridson

This story is part of Marty’s regular weekly commentary for LCD News. The full analysis, available to subscribers, is here. 


Distressed Debt: Arch Coal Skips Interest Payment, Enters 30-Day Grace Period

Arch Coal has elected not to make a $90 million interest payment due to bondholders today as it continues discussions with various creditors “in an effort to implement a comprehensive plan” to restructure its balance sheet, the company announced today.

America’s second-largest coal miner will instead enter into a customary 30-day grace period with holders of the 9.875% notes due 2019, the 7.00% notes due 2019, and the 7.25% notes due 2021, after the company was forced to cancel its proposed exchange offer with the junior lenders that it said was “the best option” for keeping the deeply distressed miner out of bankruptcy.

Arch Coal further disclosed that events of default will exist under the company’s term loan facility and receivables facility as a result of the missed interest payment and other recent events, but does not anticipate the lenders taking any remedial action in respect of any such event of default.

As reported, Arch Coal, which is saddled with a $5.1 billion debt load from its $3.4 billion acquisition of International Coal Group Inc. in 2011 and three consecutive annual losses, said in its quarterly earnings announcement that it will require a “significant restructuring” of its balance sheet if it is to continue to operate as a going concern, and further warned that it may file for Chapter 11 protection in the “near term.”

Arch Coal’s covenant-lite term loan due 2018 (L+500, 1.25% LIBOR floor) is quoted little changed at around 45/47. There is about $1.88 billion outstanding under the term loan as of Sept. 30, SEC filings show. Wilmington Trust is administrative agent.

Arch Coal 7% notes due 2020—the main notes targeted in the failed exchange offer—have not traded this morning, though the notes were recently in and around a near-worthless one cents on the dollar.

The St. Louis–based company ended the Sept. 30 quarter with liquidity of $704.4 million—$694.5 million of that was composed of cash and liquid securities.

The coal market has been dealt a devastating blow over the past couple of years as historically low coal prices, increased competition from natural gas, and environmental regulation has had a considerable impact on liquidity-constrained issuers in the coal sector. Those that have filed for Chapter 11 in the past six months include Alpha Natural Resources, Walter Energy, and Patriot Coal.

Foresight Energy last week received a written notice of default from the administrative agent on behalf of lenders under its revolving credit agreement, as a result of the previously announced opinion of the Delaware Chancery Court, the company announced late today. — Rachelle Kakouris

Follow Rachelle on Twitter for distressed debt news and insight. 

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