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S&P: As Oil & Gas Rebounds, US Distress Ratio Sinks to Lowest Level Since 2014

The U.S. distress ratio has dropped to its lowest level since September 2014, tightening to 6.5% in January, from 7.4%, amid strengthening commodity prices, according to S&P Global Fixed Income Research.

distress ratio“The oil and gas sector continued to improve throughout 2017 as hydrocarbon prices recovered and stabilized,” noted Diane Vazza, head of the S&P Global Fixed Income Research group, in a Feb. 1 report titled “Distressed Debt Monitor: Strengthening Commodities Sectors Compress The Distress Ratio To Its Lowest Level Since 2014.”

“Accordingly, since their highs in February 2016, the distress ratios for the oil and gas and metals, mining and steel sectors have steadily decreased,” Vazza said.

Moreover, the oil and gas sector accounted for the highest month-over-month decrease in the number of distressed credits, moving to 15, from 23. As such, the oil and gas sector’s distress ratio decreased to 7.9% as of Jan. 15, from 88.5% as of Feb. 16, 2016.

The outlook for the oil and gas sector in 2018 is generally stable, reflecting a continued flattening of oil and natural gas pricing, but performance will depend heavily on potential OPEC production cuts and price volatility, S&P Global says.

The distress ratio for the metals, mining and steel sector decreased to 5.6%, from 82.3% over the same roughly two-year period referenced above.

Distressed credits are speculative-grade (rated BB+ and lower) issues with option-adjusted composite spreads of more than 1,000 basis points relative to U.S. Treasuries. The distress ratio (defined as the number of distressed credits divided by the total number of speculative-grade issues) indicates the level of risk the market has priced into bonds.

As of Jan. 15, the retail and restaurants sector had the highest distress ratio at 17%, followed by the telecommunications sector at 15.9%. — Rachelle Kakouris

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Armstrong Energy Again Extends Forbearance re Missed High Yield Bond Coupon

Armstrong Energy has again extended its forbearance agreement with bondholders after the company failed to make good on a missed interest payment within the 30-day grace period that expired on July 17, 2017.

The forbearance with respect to calling an event of a default will now run until 12:01 a.m. EDT on Sept. 24, 2017, according to a company statement filed with the Securities and Exchange Commission.

Approximately 78% of existing noteholders are party to the agreement.

As reported, Armstrong elected not to make an $11.75 million interest payment on the $200 million of 11.75% senior secured notes as it continues to discuss the terms of a restructuring with lenders.

Armstrong Energy had a cash position of approximately $58.8 million as of March 31, which it expects will allow it to continue to fund its ongoing operations and meet all of its current obligations to pay suppliers, employees, vendors, and others.

Armstrong Energy produces thermal coal from surface and underground mines located in the Illinois Basin coal region in western Kentucky. The company operates five mines, including three surface mines and two underground mines located in Muhlenberg and Ohio Counties, Ky. — Rachelle Kakouris

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Toys ‘R’ Us High Yield Bonds Sink in Trading Mart Amid Bankruptcy Mention

Near-term debt of Toys ‘R’ Us went into a tailspin today after news reports that the company has hired Kirkland & Ellis to assist in a restructuring also made mention of a possible bankruptcy filing.

The company’s $208 million of 7.375% senior unsecured holdco notes due 2018 hit a 19-month low of 75, versus quotes of 95 on Tuesday, according to sources.

Such a massive deterioration could, of course, facilitate a take-out of the bonds at much more favorable price, a debt exchange being one strategy that Fitch Ratings said in a note this morning the company could employ.

“Fitch expects the $208 million of 7.375% senior unsecured holdco notes to be paid down through future exchanges into other debt or by transferring cash from various operating entities through restricted payment and investments baskets,” analyst Monica Aggarwal said in today’s report.

The company’s $450 million of debt maturities coming due in 2018 consists of a €48 million French PropCo facility due February 2018, the $208 million of holdco notes due October 2018, and $186 million of B-2/B-3 term loans due May 2018.

Toys ‘R’ Us issued the following statement to LCD, but did not immediately respond with a comment on reports that it has hired Kirkland & Ellis or to reports that it is weighing bankruptcy as an option.

“As we previously discussed on our first-quarter earnings call, Toys ‘R’ Us is evaluating a range of alternatives to address our 2018 debt maturities, which may include the possibility of obtaining additional financing. We expect to provide an update about these activities, as well as the many initiatives underway to provide an outstanding customer experience in our global retail locations and webstore during the holiday season, during our second-quarter earnings call on September 26th,” Toys ‘R’ Us communications officer Amy Von Walter said in the emailed statement.

The issuer’s covenant-lite B-4 term loan due April 2020 was quoted at a 74.75 bid today, down nearly two points from the last session, sources said.

The company last year successfully completed a series of transactions to address its looming debt maturities after the toy retailer hired advisors, including Lazard, to assist in the refinancing of its capital structure.

Wayne, N.J.–based Toys ‘R’ Us is controlled by Bain Capital, KKR, and Vornado Realty Trust. Ratings are B–/B3 CCC. — Rachelle Kakouris/Kelsey Butler

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Private Equity Companies Gamble on Oil and Gas Defaulters—S&P Global

Given the apparent bottoming out of the decline in oil prices, improving credit conditions in the oil and gas sector, and the favorable financing conditions across markets currently, many distressed oil and gas companies appear to be a high-return bet.

However, risks do exist, and adding more debt to these firms’ existing loads may prove costly if interest rates rise, if the larger U.S. or European economy dips into recession, or if oil prices once again decline, S&P Global Fixed Income Research warned in a report this week.

The drop in oil prices that began in the second half of 2014 was particularly hard felt among U.S.-based shale oil producers, as this relatively expensive extraction method proved unsustainable amid an approximate 80% drop in oil prices.

“The speculative-grade default rate has risen in recent years primarily due to disproportionate stress in the energy and natural resources sector, where oil and gas companies have been struggling with falling revenue due to lower oil prices,” said Diane Vazza, head of S&P Global Fixed Income Research.

Private equity defaulters story table 2 2017-07-11(1)Moreover, many recent defaulters in the oil and gas sector have gained extra funding sources via private equity companies taking out ownership.

Recovery prospects
In terms of recovery prospects, bond prices for defaulting U.S.-based firms with private equity ownership do show some interesting distinctions among sectors. In the energy and natural resources sector, the average bond prices leading up to default were generally lower than those in other industries. But these same firms’ average bond prices were generally higher a month after default.

Generally, favorable recent bond prices for the oil and gas segment are in line with or slightly better than historical recovery rates.

The full report can be found here ($). — Rachelle Kakouris

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S&P: US Distress Ratio Sinks to 6.8%, a 32-Month Low

The U.S. distress ratio has continued its downward trend and now stands at 6.8% as of May 15, 2017, from 7% as of April 17.

US distress ratio

This is its lowest level since September 2014 when the ratio stood at 5%, and marks a steady decline from its February 2016 peak when it reached 34%, according to S&P Global Ratings Fixed Income Research.

This decline reflects somewhat stabilized commodity pricing pressure but belies an increase in the distress ratio of the retail and restaurants sector, which now has a commanding lead of 20.6% with 21 distressed issues.

The ratio measures speculative-grade issues with option-adjusted composite spreads of more than 1,000 basis points relative to U.S. Treasuries, and indicates the level of risk the market has priced into its bonds.

By sector, retail and restaurants is followed by the oil-and-gas sector, which had the second-highest ratio at 10.6%. — Rachelle Kakouris

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Nine West retains Lazard to address 2019 maturities

Nine West Holdings has retained Lazard as its investment banker to “proactively evaluate a long-term capital structure solution,” the company announced. Nine West has no near-term debt maturities, its next maturity date being 2019, and is in compliance with the indentures and agreements governing its debt facilities, the company said.

As of Dec. 31, liquidity was $160 million.

Ralph Schipani, interim CEO of Nine West Holdings, said the company will be working with Lazard to proactively address its 2019 debt maturities.

Nine West covenant-lite senior secured term debt due 2019 (L+375, 1% LIBOR floor) is currently quoted in the low 70s, while its unsecured term loan due 2020 (L+525, 1% floor) is marked at 26/29.

Nine West’s existing loans were syndicated in March 2014 to help support Sycamore Partners and KKR’s roughly $1.2 billion purchase of Jones Group, and the business has since been rebranded Nine West. The $445 million senior secured term loan was issued at 99.5, while the unsecured loan was issued at 99. Morgan Stanley is administrative agent.

The issuer is rated CCC/Caa3. The secured term loan is rated B–/Caa1, with a 1 recovery rating from S&P Global, while the unsecured loan is rated CCC–/Caa3, with a 5 recovery rating.

Nine West is a global designer, marketer, and wholesaler, with product expertise in apparel, footwear, jeans, jewelry, and handbags. — Staff reports

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S&P cuts Guitar Center to CCC+ on ‘unsustainable capital structure’

S&P Global Ratings lowered its corporate credit rating on Guitar Center Holdings to CCC+, from B–. The outlook is negative.

The agency said the downgrade reflects its view that strategic operating initiatives will be insufficient to meaningfully improve revenue and profits ahead of looming sizable debt maturities in early 2019, especially in light of a challenging retail environment that S&P Global said it expects will continue.

As such, given thin EBITDA interest coverage, high debt leverage, and weak cash flow from operations and expectations at S&P Global that the company will not improve operations meaningfully ahead of its early 2019 debt maturities, the agency views the company’s capital structure as unsustainable.

Still, S&P Global believes the company will maintain access to and availability under its ABL revolver, providing adequate liquidity for operating needs, particularly for seasonal working capital requirements over the next 12 months and affording the company some time to execute on planned operational improvements.

In conjunction with the lower corporate credit rating, S&P Global also lowered its issue-level rating on the company’s $375 million asset-based lending (ABL) revolver to B from B+; its $615 million of 6.5% senior secured notes due April 15, 2019 to CCC+ from B–; and its $325 million of 9.625% senior unsecured notes due April 15, 2020 to CCC– from CCC.

S&P Global expects adjusted debt leverage to slightly improve to 9.4x in 2017 on modest EBITDA growth. Adjusted total debt to EBITDA was high at close to 10x at Dec. 31, 2016. Adjusted EBITDA interest coverage is thin at 1.3x.

As at March 14, the company has approximately $134 million of borrowing availability under the $375 million ABL revolving facility.

Guitar Center, Inc. operates as a retailer of music products in the United States. The company is based in Westlake Village, Calif. Guitar Center, Inc. operates as a subsidiary of Guitar Center Holdings, Inc. — Rachelle Kakouris
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S&P Global: Sequa High Yield Bonds Cut to SD at on Distressed Debt Exchange

S&P Global Ratings lowered its corporate credit rating on Sequa Corp. to SD, from CC, and removed all ratings from CreditWatch, where they were placed with negative implications on April 4, 2017.

At the same time, the agency lowered its issue-level rating on the company’s $350 million of senior unsecured notes to D, from C. The 6 recovery rating is unchanged, indicating expectations for negligible recovery (0–10%; rounded estimate: 0%) in the event of a payment default.

The downgrade follows Sequa’s completion of an exchange offer for its senior unsecured notes due 2017. Under the updated terms of the offer, approximately $320 million of the $350 million of senior notes were exchanged for new preferred equity.

S&P Global viewed the offer as a distressed exchange due to the fact that it is likely the company would default on the existing securities over the near term if the exchange did not occur.

In addition, S&P Global believes investors will receive less than what was promised on the original securities.

Certain noteholders did not consent to the exchange, leaving approximately $30 million of notes outstanding. The company plans to use the proceeds from a $20 million increase in the new term loan (now $920 million) and balance sheet cash to redeem the outstanding notes.

The proceeds from the new term loan and $190 million of equity from The Carlyle Group (the company’s equity sponsor) and other investors were used to repay the company’s existing bank debt as part of the transaction. — Rachelle Kakouris

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Neiman Marcus High Yield Bonds Slump in Trading Amid Retail Pressure

Neiman Marcus 8% cash-pay notes due 2021 slumped 5.25 points to a new all-time low on Monday, breaking through 60 for the first time as the issuer continues to come under heavy scrutiny amid pressure across the brick-and-mortar retail sector.

The majority of the sell-off was driven by short sellers, with some lightening up of positions reported by investors looking for a better entry point following the recent string of disappointing earnings out of the sector. “They don’t believe it’s a restructuring name, they are just leaning on it because they can and because the cost of carry is just too high,” said one source.

The 8.75% senior PIK-toggle notes lost three points, to 55. Those bonds were issued in 2013 to finance a buyout by Ares Management and the Canada Pension Plan Investment Board.

Further up the capital structure, Neiman Marcus’ TLB (L+325, 1% LIBOR floor) was quoted at 81.25/82.25, down about a point from the last session, sources said. Before the last few weeks, the last time the term debt fell to the low 80s was in early 2016, when the once luxury retailer in January shelved its IPO plans after it reported in December its fifth straight quarter of declining sales and a 25% drop in EBITDA. December’s drop in EBITDA followed a 40% EBITDA decline in its September quarter.

In addition to the string of poor earnings from retailers fueling expectations that Neiman Marcus’ numbers will be weak when it reports in the second week of March, sources also point to weak foot traffic and post-election traffic disruption on Fifth Avenue in New York potentially impacting Neiman Marcus’ Bergdorf Goodman store.

Furthermore, investors are reportedly concerned about the company’s inventory levels, particularly in light of the company’s operational challenges related to the launch of its new common merchandising system, NMG1.

Dallas, Texas–based Neiman Marcus Group, Inc., through its subsidiaries, operates as an omni-channel luxury fashion retailer primarily in the United States. As of Oct. 29, the retailer’s long-term debt totaled $4.77 billion, according to SEC filings. The company is rated B–/B3 with negative outlook on both sides. — Rachelle Kakouris/Kelsey Butler

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S&P: “Weakest Link” Count Remains High, with Oil/Gas Again Leading Way

The global weakest links count continues elevated in 2016, led by oil and gas names, which comprise nearly a quarter of all weak links (59 issuers), according to S&P Global Fixed Income Research.

weakest links

Weakest links are issuers rated B- or lower by S&P Global, with a negative outlook or implication. They are useful as potential default indicators because these issuers on the lower end of the speculative-grade spectrum are poised to be downgraded, and have a greater default risk than higher-rated issuers.

Total rated debt among the 247 weakest links clocks in at $346 billion.

S&P Global Credit Portal subscribers can access the full report here. 

Of the 250 corporate U.S. CLOs tracked by the composite, 16 fell in the weakest links category, led by oil-and-gas and media issuers, with four issuers each. Behind oil and gas, financial and consumer markets topped the weakest link issuer list.

Among the group of the top 250 corporate obligors in outstanding rated U.S. cash flow CLOs, technology firm Avaya was given a CCC rating, and put on a negative CreditWatch, along with Cumulus Media, Fieldwood Energy and Sequa. Ocean Rig and Caesars Entertainment also were booked with negative outlooks, both at CCC-.

There are 16 issuers that overlap with the CLO list, whose corporate ratings range from B- and CC, six being rated B-, four rated CCC, three CCC+, two CCC-, and one CC.

The top new addictions to the weakest links default count, primarily stemmed from the U.S., with 171, or 69%.2 of the global composite.

The average monthly weakest-link issuers count has not been higher since the 2009 recession. – James Passeri

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