Stellus Capital outlines junior debt investment for Douglas in 10-Q

Stellus Capital Investment Corp. outlined details of a junior debt investment in specialty chemicals company Douglas Products in an SEC filing for the second fiscal quarter.

Stellus Capital’s investment portfolio as of June 30 showed equity and a $9 million, L+1,050 (0.5% floor) second-lien loan due 2020 to Douglas Products. The loan accounted for 5% of net assets in the investment portfolio of Stellus Capital.

The debt was part of financing backing two acquisitions by Douglas Products. CIT provided senior debt.

Altamont Capital Partners also provided capital. Douglas Products has been a portfolio company of Altamont Capital Partners since 2007.

Douglas Products acquired the Vikane and ProFume businesses from Dow AgroSciences, a subsidiary of The Dow Chemical Company. As part of the transaction, Douglas acquired a manufacturing facility that Dow will continue to operate, a statement on July 6 said.

Douglas Products, based in Liberty, Mo., manufactures and distributes specialty chemical products for pest management, thermal fluids, and sanitary sewer applications.

Investments of San Francisco-based Altamont Capital Partners include Indianapolis-based used-car dealership J.D. Byrider, fabrics and furnishings designer Robert Allen Group, insurance loss adjuster McLarens Young International, snowboard maker Mervin Manufacturing, and specialty foods holding company Tall Tree Foods.

Stellus Capital Investment Corporation is a BDC that invests primarily in private middle market companies generating $5 million to $50 million of EBITDA. Shares trade on the NYSE as SCM. – Abby Latour

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


BlackRock launches new European high-yield bond fund

BlackRock has launched the BlackRock Global Funds (BGF) European High Yield Bond Fund, which will be managed by Michael Phelps, head of European Fundamental Credit, and co-managed by Jose Aguilar, senior portfolio manager in European Fundamental Credit.

The fund will be benchmarked against the Barclays Pan European High Yield 3% Issuer Constrained Index. A minimum of 70% of the fund will be invested in non-investment grade bonds, and it will contain a diversified set of holdings across multiple sectors and geographies.

The BGF European High Yield Bond Fund complements the existing BGF range, which includes the BGF Global High Yield Bond Fund and the BGF US High Yield Bond Fund.

BlackRock’s global fixed income business manages $1.42 trillion on behalf of clients, with over 400 professionals providing expertise on research, portfolio management, risk management and quantitative analysis (as at 30 June 2015). – Luke Millar


Bond prices rise out of 2015 trough in seasonal midweek observation

The average bid of LCD’s flow-name high-yield bonds advanced 25 bps in today’s reading, to 97.72% of par, yielding 7.42%, from 97.47% of par, yielding 7.48%, on Aug. 13. The reading was mixed, with eight gainers, four decliners, and three of the 15 constituents unchanged.

Today’s increase is the first in two weeks, but take note it’s a seasonal once-a-week observation, so it’s covering four sessions, rather than three. And going forward, the measurements will be week over week until after Labor Day.

Nonetheless, the increase dents the 40 bps decline in Thursday’s report, which put the average at the 2015 low of 97.47. Prior to that, the Tuesday reading was 97.87, so depending on how one views it, the week over week reading is either up 25 bps or down 15 bps, so it’s really negligible.

More broadly, and putting the seasonal midweek reading aside for purposes, the average bid is deeply negative reaching back towards the July inflection. Indeed, the average is down 193 bps dating back two weeks and off 161 bps in the trailing four weeks. However, it’s still up 202 bps in the year to date.

With today’s increase in the average bid price, the average yield to worst slips six basis points, to 7.42%, and the average option-adjusted spread to worst cinched inward by six basis points, to T+589. Just as the average bid was at a 2015 low last week, both yield and spread were at 2015 wides last week.

The yield and spread in today’s reading are wider than the broad index. Indeed, the S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed yesterday, Aug. 18, with a 6.99% yield-to-worst and an option-adjusted spread to worst of T+552.

For further reference, take note that a June 24, 2014 reading of 106.98 – close to the February 2014 market peak of 107.03 – had the flow-name bond average yield at 5.02%, an all-time low, but spreads weren’t quite there. Indeed, the average yield was 7.63% at the prior-cycle peak in 2007, and the average spread at the time was T+290.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell 12 bps in today’s reading, to 98.66% of par, for a discounted loan yield of 4.22%. The gap between the bond yield and discounted loan yield to maturity stands at 320 bps. – Staff reports

The data:

  • Bids rise: The average bid of the 15 flow names edged up 25 bps, to 97.72.
  • Yields fall: The average yield to worst slipped six basis points, to 7.42%.
  • Spreads tighten: The average spread to U.S. Treasuries edged inward by six basis points, to T+589.
  • Gainers: The largest of the eight gainers was Hexion 6.625% notes due 2020, which jumped two full points, to 92.
  • Decliners: There were four decliners, led by California Resources 6% notes due 2024, which slumped 1.5 points, to 73.5.
  • Unchanged: Three of the constituents were unchanged.


American Apparel raises going concern warning as losses deepen

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

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

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

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

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

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

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

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

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

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

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

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


Fridson: High yield bonds no longer are extremely overalued (thanks to commodities)

Synopsis: The high-yield universe’s extreme overvaluation has ended, but only because spreads have widened dramatically on troubled Energy and Metals & Mining bonds. Record-low covenant quality in July was an optical illusion arising from a drop-off in Caa issuance.

With the help of a sharp sell-off in early August and some reduction in the Fair Value spread, the high-yield market has exited the extreme overvaluation zone. The significance of that change depends, however, on whether one is a direct investment manager or an end investor, e.g., a plan sponsor, endowment fund, or mutual fund shareholder. Since the end of June commodities-related issues have widened dramatically, but in aggregate the spreads on other issues remain unduly tight.

Gap versus fair value shrinks

By way of background, our valuation conclusions are based on econometric modeling methodology described in “Determining fair value for the high-yield market” (Nov. 13, 2012). (This report is now also available at In brief, we find that 82% of the historical variance in the option-adjusted spread (OAS) of the BofA Merrill Lynch US High Yield Index is explained by five variables:

  • Credit availability, derived from the Federal Reserve’s quarterly survey of senior loan officers
  • Capacity utilization
  • Industrial production
  • Current speculative-grade default rate
  • Five-year Treasury yield


Historically, when the overall risk of the market, as measured by these five variables, has been at its present level, the index’s OAS has averaged exactly 600 bps. The actual Aug. 31 spread was 536 bps, a difference of –64 bps. That shortfall was less than half as great as the –130 bps difference (equivalent to one standard deviation) that we characterize as an extreme. By Aug. 14, the actual OAS had widened to 552 bps, reducing the gap versus fair value to –48 bps.

In contrast to these comparatively mild overvaluations, the Fair Value spread on June 30 was 630 bps versus an actual OAS of 500 bps, a difference of 130 bps that just qualified as an extreme. In the intervening month, Credit Availability improved slightly and Industrial Production rose from +0.1% to +0.6%. The five-year Treasury yield, which is inversely correlated with the spread, dropped from 1.63% to 1.54%. Neither Capacity Utilization nor the Current Speculative-Grade Default Rate changed materially. The chart below depicts the historical relationship between the actual spread and Fair Value.

high yield spreads
Energy and Metals & Mining versus the rest of the universe

Officially, the spread on the BofAML High Yield Index increased from 500 bps on June 30 to 552 bps on Aug. 14. Half of that 52 bps increase was attributable, however, to just two industry subindexes – the BofA Merrill Lynch US High Yield Energy Index and the BofA Merrill Lynch US High Yield Metals & Mining Index. The former widened from 712 to 922 bps and the latter from 979 to 1,219 bps. Using the weighted-average method, we find that the remainder of the BofAML High Yield Index widened by just 26 bps, from 443 to 469 bps (see note 1).

For a speculator contemplating the purchase of a high-yield mutual fund, the widening to 552 and associated elimination of extreme overvaluation are highly pertinent. True, a fund with a market weighting in Energy and Metals & Mining contains a lot of risk. If commodity prices temporarily stabilize and the market rallies, however, the mutual fund shareholder will benefit on the basis of beta.

The situation is different for a portfolio manager who is trying to beat the high-yield benchmark. At an OAS of 469, the 84% of the high-yield universe not accounted for by Energy or Metals & Mining remains extremely overvalued, at –131 bps versus fair value. The “reasonable” prices on high-yield bonds are largely a function of very wide spreads on commodities-related issues that the PM is probably hesitant to add to at this point. With the rest of the index still quite rich, generating alpha through issue selection represents a tough challenge.

July’s record-low covenant quality was an optical illusion

Moody’s reported a high-yield covenant quality score of 4.60 in July. As explained in “Covenant quality decline reexamined” (Oct. 1, 2013), Moody’s rates each covenant of essentially every U.S. high-yield new issue on a scale of 1 (strongest) to 5 (weakest). The agency weights those scores to assign an overall covenant quality score to the issue. Moody’s then compiles the issue ratings to calculate a market-wide covenant quality (CQ) index. In the chart below the dashed line indicates that July’s covenant quality was the weakest since the inception of the series in January 2011.

high yield cov quality

The solid line traces FridsonVision’s version of the covenant quality series. We modify the Moody’s CQ Index to remove noise arising from month-to-month changes in the calendar’s ratings mix. On average, covenants are stronger on triple-Cs than on single-Bs and stronger on single-Bs than on double-Bs. Therefore, as an example, if issuance shifts downward in rating in a given month without covenant quality changing within any of the rating categories, the Moody’s CQ Index will show a spurious improvement. We eliminate such false signals by holding the ratings mix constant at an average calculated over a historical observation period.

June’s ratings mix was close to the historical average of roughly one-quarter each in Ba and Caa and one-half in B. In order, from top to bottom, the weights were Ba 24%, B 48%, and Caa 28%. During July, however, quality shifted radically upward, to Ba 56%, B 25%, and Caa 19%. It is not unusual for new issue quality to improve during negative-return months such as July, as those conditions make it unattractive for the lowest-rated credits to come to market.

Because credit quality is inversely correlated with covenant strength, the June-to-July shift in ratings mix created the appearance that covenant quality in general deteriorated, based on the move from 4.55 in June to 4.60 in July. On a rating-for-rating basis, however, our calculations show that covenant quality improved from 4.56 to 4.38. This was one of the most dramatic divergences ever between the raw data and the refined analysis that filters out the effect of monthly variance in ratings mix.

Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC, is a contributing analyst to S&P Capital IQ. His weekly leveraged finance commentary appears exclusively on S&P Capital IQ LCD. Marty can be reached at

Research assistance by Yueying Tang and Zizhen Wang.


The BofAML High Yield Energy Index accounted for 17.79% of the BofAML High Yield Index’s market value on June 30 and 16.35% on Aug. 14. For the BofAML High Yield Metals & Mining Index, the comparable figures were 3.36% and 2.99%. As the prices of their bonds decline, these two industries exert less and less impact on the overall index’s spread. Their impact may also be reduced by defaults, which reduce the face value of the industry subindexes in which they occur. Moreover, a default by a bond previously quoted at an extremely wide spread will cause the relevant subindex’s spread to tighten as that issue exits.

You can follow Marty on twitter.

Marty’s analysis is on LCD each week (with a monthly view, as well).


High yield bond market so far declines summer break as new issuance continues

The high-yield primary market hasn’t shut for the remainder of summer just yet. Today, Hill-Rom stepped off the shadow calendar with a $425 million offering to fund its acquisition of Welch Allyn. KIK Custom Products also emerged with talk on its $390 million offering, which had been delayed from last week. Both deals are expected to price tomorrow, along with ONEOK’s $500 million offering, announced last week via Citi, according to sources. If no other deals are launched this week and next, August would end with a total volume of $10.185 billion. Despite the sluggish pace this month, that would still beat July’s $10 billion tally and far outpaces the $3.1 billion priced in August of 2014, according to LCD data.

Medical technology firm Hill-Rom looks to raise $425 million of eight-year (non-call three) senior notes via Goldman Sachs lead left. Recall that investors received allocations for the $800 million B term loan as part of the acquisition financing last month. The financing package also comprises a $1 billion A term loan and $500 million revolver. Hill-Rom carries a corporate credit rating of BB+/Ba2, having been downgraded two notches from BBB in July by S&P following news of the planned Welch Allyn bolt-on. The outlook is stable, according to S&P.

Elsewhere, KIK Custom Products released guidance of a 10.5% all-in yield on its $390 million, eight-year (non-call three) offering of senior notes. The deal was in market last week but investors pushed back a bit from early whispers in the 9.5% area, sources relay. Along with wider talk, leads also revised covenants on the notes. Proceeds from the bond deal and concurrent loan will be used to fund KIK’s buyout by Centerbridge Partners.

Finally, ONEOK roadshowed its $500 million offering of eight-year senior bullet notes in the West Coast today, via Citi as sole bookrunner, with pricing due tomorrow. Proceeds, along with cash on hand, will be used to purchase additional common units from ONEOK Partners. Ratings on the bond offering are BB+/Ba1. – Staff reports


Bankruptcy: Samson Resources revamp sees Chapter 11 filing by Sept. 16

Samson Resources announced on Aug. 14 that it has entered into a restructuring support agreement with certain lenders holding 45.5% of the company’s second-lien debt, and with its equity owners, KKR, on a proposed balance sheet restructuring that “would significantly reduce the company’s indebtedness and result in an investment of at least $450 million of new capital.”

As a result, the company said it would not make the interest payment due today under its senior notes indenture, but instead would use the 30-day grace period triggered by its non-payment “to build broader support for the restructuring and continue efforts to document and ultimately implement the reorganization transaction as part of a Chapter 11 filing.”

Samson is just the latest casualty of the collapse of energy markets. “We – like many of our peers – have not been able to overcome industry headwinds that significantly reduced our cash flows, limited our ability to reinvest in our assets and prevented us from selling non-core assets as we had planned,” said Randy Limbacher, the company’s CEO.

The company said that, in the meantime, its operations would continue “uninterrupted.”

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

According to a Form 8-K filed with the Securities and Exchange Commission, the investment would consist of at least $325 million to purchase new common equity in the company, and no more than $125 million of new second-lien debt to be issued by the reorganized company. The investment may be increased by $35 million to an aggregate of $485 million to further bolster liquidity, the company said, if management determines by Nov. 1 that pro forma liquidity upon emergence from Chapter 11 would be less than $350 million.

The second-lien lender group would backstop a rights offering to second-lien lenders contemplating $413.25 million in new equity and $36.75 million in new second-lien debt (with the debt component used first to satisfy any backstop commitment up to the $125 million maximum amount).

According to the RSA term sheet, the new second-lien debt would be structured as a term loan with a five-year term, at an annual interest rate of 8.5% for the first year, increased by 50 basis points every six months thereafter. There would be no prepayment penalty for the first year, with call protection then set at 102, 101, and par.

Backstop parties would receive a $10 million cash fee, to be paid out of the offering proceeds. In addition, $45 million of equity would be issued to backstop parties at a 20% discount to plan enterprise value, which the RSA sets at $1.275 billion.

The rights offering proceeds would then be used to pay down the company’s existing reserve-based revolver to $650 million.

Under a proposed reorganization, second lien lenders would then receive all remaining equity in the reorganized company not otherwise issued under the plan, i.e., via the rights offering, 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).

The proposal contains a $10 million break-up fee.

The RSA contemplates a Chapter 11 filing by Sept. 16. If holders of at least two-thirds of second lien debt (the amount needed for acceptance of the proposed reorganization plan in a Chapter 11 proceeding) do not sign on to the RSA by Oct. 14, however, the company would have the option to pursue a sale of assets under Section 363 of the Bankruptcy Code, with the backstop parties serving as stalking-horse bidders.

According to the term sheet, in a Section 363 sale scenario, the company’s enterprise value would be $1.175 billion, with a minimum overbid of $1.4 billion. The stalking-horse agreement would carry a break-up fee of $35.25 million, or 3% of the purchase price.

Blackstone Advisory Partners is the company’s investment banker, and Alvarez & Marsal is its restructuring advisor. Kirkland & Ellis is restructuring counsel. – Alan Zimmerman


Ares Management, which is buying Kayne Anderson, is selling $300M bonds

Shortly after announcing a new acquisition, Ares Management, via its Ares Finance Co. II LLC subsidiary, is in market with a $300 million, 144A/Reg S offering of 10-year notes, sources said. The issue is guided to a BBB+/BBB+ profile (S&P/Fitch). Bookrunners are BAML and Wells Fargo.

Last month, Los Angeles-based alternative asset management firm Ares announced its plan to acquire Kayne Anderson Capital Advisors in a $2.55 billion transaction, which is expected to close in early 2016. The acquisition target is an alternative investment firm with $26 billion of assets under management as of March 31.

On July 31, Standard & Poor’s downgraded Ares Management to BBB+, from A-, based on the expected increase in leverage due to the Kayne Anderson purchase. “We expect the company to issue approximately $750 million of debt to fund a portion of the acquisition, raising leverage, as measured by debt to Standard & Poor’s-adjusted EBITDA, to 1.5x-2.0x,” the agency had said last month.

“Under the terms of the agreement, Ares will issue between $1.8 billion and $2.05 billion of common equity to fund the majority of the consideration. Ares will finance the rest with cash, primarily through a debt issuance. As a result, we believe the additional debt burden should result in pro forma forecasted leverage, as measured by debt to Standard & Poor’s-adjusted EBITDA, of 1.5x-2.0x, within our ‘modest’ financial risk profile assessment,” analysts said.

At the same time, Fitch assigned a BBB+ rating to Ares Management. “Rating constraints include lower fee-related EBITDA (FEBITDA) margins than peers, weaker revenue diversity given a heavier credit concentration, more limited upside from incentive income, modestly higher leverage, and a relatively low level of on-balance sheet liquidity, as measured by cash or liquid securities relative to debt outstanding,” Fitch said.

“At March 31, 2015, Ares’ total debt amounted to $385 million, consisting of $250 million of public unsecured notes, $60 million of corporate revolver draws and a $75 million guarantee on the credit facility borrowings of Ares Commercial Real Estate Corporation (ACRE), a publicly traded commercial mortgage real estate investment trust managed by Ares. Based on this debt balance, Fitch calculates the firm’s leverage (debt/FEBITDA) to be 3.31 times (x) on a trailing 12 month (TTM) basis, which compared to a peer group average of 2.90x,” Fitch analysts noted.

Initial whispers for today’s proposed 10-yer offering surfaced in the T+275 area, indicating a reoffer yield near 4.91%. – Gayatri Iyer


Bankruptcy: Hercules Offshore files prepackaged Ch.11 in Delaware

Hercules Offshore has filed its prepackaged Chapter 11 today in Wilmington, Delaware, implementing a $1.2 billion debt-for-equity swap restructuring plan previously announced in June.

In a prepackaged bankruptcy, a company conducts the vote solicitation on its proposed reorganization plan prior to filing for Chapter 11. Once the company gains sufficient creditor support and does file its Chapter 11 petition, the bankruptcy court is asked to confirm that the vote solicitation process, as well as the terms of the proposed reorganization plan and the information contained in the disclosure statement, all meet legal requirements.

Hercules said its plan gained “overwhelming” support from the existing senior noteholders with, more than 300 holders of the notes totaling in excess of $1.2 billion voting to accept the plan. Only two holders with approximately $320,000 of the senior notes voted against, according to a company press release. The said notes are Hercules 10.25% notes due 2019, 8.75% notes due 2021, 7.5% notes due 2021, and 6.75% notes due 2022, which in sum total roughly $1.2 billion outstanding.

As previously reported, the investors agreed to a deleveraging transaction by which all senior notes convert to new common equity, as well as backstop a new $450 million loan (L+950, 1% floor, 4.5 years). The new money will be used to fully fund the remaining construction cost of the Hercules Highlander jackup rig and provide additional liquidity to fund operations.

More specifically, the $1.2 billion of senior notes convert to equity representing 96.9% of new common shares, and existing shareholders will get the 3.1% balance, plus warrants.

According to the company’s disclosure statement, the recovery rate for senior noteholders would be 41%, while the range of reorganized equity value implies a recovery rate of 32-47.8%. The debt is quoted in the low 30s, implying a value at the low end of the range.

Chief executive officer John T. Rynd said in a company press release that the new capital structure will provide a better foundation for Hercules to meet the challenges in the global offshore-drilling market due to the downcycle in crude-oil prices and expected influx of newbuild jackup rigs over the coming years.

Hercules estimated its reorganized enterprise value at $535-725 million, implying a reorganized equity value of $402-592 million, according to the disclosure statement accompanying the company’s proposed prepackaged reorganization plan.

The Chapter 11 reorganization is expected to conclude in approximately 45-60 days. More information about the case can be found at – Staff reports