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S&P: Oil & Gas Cos. Lead the Way in Potential U.S. Credit Downgrades

upgrades downgrades bias

The outlook for the energy sector continues grim.

Of the 318 U.S. entities that S&P deems ‘poised for downgrade,’ oil and gas concerns comprise the most of any industry, at 45. What’s more, nearly half of the 157 O&G issuers rated by S&P for this analysis have a Negative Bias, also the most of any industry.

S&P tracks possible upgrades/downgrades as an indicator of economic/market stress. As of Feb. 29, the gap between potential downgrades and upgrades (187) increased significantly from the number a year ago (129). These numbers include speculative grade and investment grade entities. – Tim Cross

The full analysis is available to S&P Global Credit Portal subscribers here. It includes charts detailing upgrade/downgrade bias distribution by rating, high yield vs. investment grade, sector specifics, and a full list of issuers on CreditWatch. 

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Western Digital Readies $5.6B Bond Offering Backing SanDisk Buy

Western Digital this morning launched off the shadow calendar its SanDisk acquisition bond financing, comprising $1.5 billion of seven-year (non-call three) secured notes and $4.1 billion of eight-year (non-call three) senior notes, according to sources. Roadshows are scheduled to run Monday, March 21 through Monday, March 28, with pricing to follow via a Bank of America–led bookrunner team, the sources added.

While first call premiums have not been outlined for the two series, take note that while par plus 75% coupon to balance the short schedule is most typical, an issuer-friendly arrangement at par plus 50% coupon has become more acceptable over the past year. Beyond that, market sources relay that the equity-clawback feature on both tranches is most typical, as three-year for up to 35% of the issue, at par plus coupon, and the change-of-control call provisions are also regular-way, at 101% of par.

Additional bookrunners on the long-awaited effort are J.P. Morgan, Credit Suisse, RBC, and HSBC. Proceeds, along with those from a TLA, TLB, and an RC draw, will be used to back the $19 billion acquisition of the rival storage-technology company, and issuance is under Rule 144A for life.

As reported, the company has guided the $4.2 billion U.S. dollar TLB, and $550 million-equivalent, euro-denominated TLB at L/E+450–475, with a 0.75% floor and OID of 98.5. The seven-year, covenant-lite term debt will include 12 months of 101 soft call protection, and at current guidance the term loan would yield roughly 5.64–5.9% to maturity.

Take note that the same bank line up is arranging the loans but J.P. Morgan is the left lead. A planned $3 billion, five-year A term loan has been increased to $3.75 billion, with pricing set at L+200. Western Digital also plans to draw down a portion of its $1 billion, five-year revolver at closing.

Issuer ratings have firmed at BB+/Ba1/BB+. The secured debt is rated BBB–/Ba1/BBB–, with a 2L (lower end of substantial, 80–90%) recovery rating from S&P’s. The unsecured debt is rated BB+/Ba2/BB+, with a 4L (lower end of average 40–50%) recovery rating.

Irvine, Calif.–based Western Digital makes hard disk drives, solid state drives, and cloud-network storage solutions, with a client focus on set-top boxes, printers, in-car navigation devices, and other general consumer electronics. Milpitas, Calif.-based SanDisk makes solid-state drives and other storage solutions with a client focus on computers, tablets, phones, and wearables. — Matt Fuller/Luke Millar

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Leveraged Finance Fights Melanoma benefit planned for May 24

The fifth annual Leveraged Finance Fights Melanoma benefit and cocktail party is planned for May 24 at the Summer Garden and Sea Grill at Rockefeller Center. Funds raised at the event will support the Melanoma Research Alliance (MRA), the world’s largest private funder of melanoma research, which was founded in 2007 by Debra and Leon Black under the auspices of the Milken Institute.

Since this event was launched in 2012, the leveraged finance community has come together and generously supported over $5 million of cutting-edge cancer research. These funded studies have accelerated advances in immunotherapy treatments that have led to breakthroughs like anti-PD-1 agents which are being used to treat melanoma, were recently approved to treat lung cancer, and are now being tested in other tumors including bladder, blood, and kidney cancers.

The event co-hosts are Brendan Dillon from UBS; Lee Grinberg from Elliott Management; George Mueller from KKR; Jeff Rowbottom from PSP Investments; Cade Thompson from KKR; and Trevor Watt from Hellman & Friedman. Attendees include the biggest names in leveraged finance, from all of the top banks, many investment houses, several law firms, select issuers, and some private equity sponsors. As with the prior events, LCD is a proud sponsor.

Due to ongoing operational support from its founders, 100% of donations to MRA go directly to support research programs working toward a cure for melanoma, the deadliest type of skin cancer. Since MRA began its work, 11 new treatments have been approved by the FDA.

Funds raised from prior year events have supported six MRA research awards at institutions spanning the U.S. These projects focus on targeted and immunotherapy treatments, which boost the immune system to fight off cancer more effectively. The studies address critical research questions to advance the development of new therapies for melanoma patients and inform progress against cancer as a whole.

“We’re making tremendous breakthroughs in understanding and treating melanoma, including several new therapies that could be game-changers for the entire field of oncology,” said Jeff Rowbottom, LFFM co-host and MRA board member. “The Leveraged Finance Fights Melanoma events have supported important research that is enabling innovations in the way we treat cancer.”

The objectives for the 2016 LFFM event are to increase awareness, to raise funds to further advance research, and to save lives. Melanoma awareness and early detection are vital when it comes to combating the disease; if melanoma is detected early—before it has spread beyond the skin—it is almost always treatable. Past events have led to many members of the leveraged finance community seeing dermatologists for skin checks and even to the discovery and treatment of several early stage melanomas.

Tickets are $300. For further information about the event and to purchase tickets, please visitcuremelanoma.thankyou4caring.org/lffm2016. Those seeking information about the event and sponsorship opportunities can contact Rachel Gazzerro of MRA at (202) 336-8947 or RGazzerro@curemelanoma.org. — Staff reports

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Peabody Energy, Country’s Largest Coal Miner, Warns of Bankruptcy

Peabody Energy, America’s largest coal miner, disclosed today that it has elected not to pay $71 million of interest payments due March 15, and warned that it may have to seek Chapter 11 bankruptcy protection if it is unable to obtain alternative sources of capital to service its $6.2 billion debt load.

As expected, Peabody said its auditor included a going concern warning in today’s form 10-K filing, which absent a waiver or a cure, will put the company in default of its 2013 credit facility. Peabody had previously warned that its accounting firm may be required to issue the warning unless a proposed $358 million sale of three Western U.S. coal mines to Bowie Resources closes before the release of its audited financial statements.

With losses snowballing more than 150% further into the red to almost $2 billion last year amid challenging conditions in the coal industry, Peabody once again cautioned that it may not be able to complete any such asset sales or realize sufficient proceeds to meet its debt obligations, and could therefore be required to reorganize the company “in its entirety,” including through bankruptcy proceedings.

“We have engaged in discussions with holders of our debt regarding new financings as well as debt exchanges and debt buybacks to improve our liquidity and reduce our financial obligations,” the company said in its year-end results. “If we are not able to timely, successfully or efficiently implement the strategies that we are pursuing to improve our operating performance and financial position, obtain alternative sources of capital or otherwise meet our liquidity needs or maintain covenant compliance under our 2013 Credit Facility, we may need to voluntarily seek protection under Chapter 11 of the U.S. Bankruptcy Code.”

Peabody further advised that without the completion of the proposed asset sale, it could breach the restrictive covenants governing the credit facility and senior secured second-lien notes, which if not cured or waived, could make the credit facility and second-lien notes immediately payable, and result in a cross-default or cross-acceleration of its other debt.

Peabody has entered into a 30-day grace period with respect to a $21.1 million interest payment due March 15 on its 6.5% senior notes due September 2020, and a $50 million interest payment due March 15 on its 10% senior secured second-lien notes due March 2022.

Exchanges hinge on asset sale
Recall Bowie in late January launched via Deutsche Bank and Citigroup a $350 million term loan on a best-efforts basis to help to fund the acquisition and refinance its existing debt. Though commitments on the loan were due Feb. 8, there have been no updates on the transaction since the bank meeting on Jan. 26. Standard & Poor’s Ratings Services noted in a Jan. 21 report that financing for the transaction would also come from $313 million of equity from Blackstone Energy Partners.

The debt-laden coal company has been in negotiations with debtholders about how to manage its capital structure, and SEC filings show raising cash from asset sales has been a component in at least a couple of the transactions.

Preliminary proposals filed with the SEC in late January for a debt exchange targeting the most pressing maturity in Peabody’s capital structure—its $1.5 billion 6% senior notes due 2018—would be contingent upon the receipt of not less than $500 million in cash from asset sales, SEC filings show.

As reported, Peabody previously entered into non-disclosure agreements regarding the prospect of potential debt exchanges relating to its 6.00% senior notes due 2018, 6.50% notes due 2020, 6.25% notes due 2021, 7.875% notes due 2026, and 10.00% senior secured second-lien notes due 2022.

The company’s debt trades at deeply distressed levels. Peabody’s covenant-lite term loan due 2020 (L+325, 1% LIBOR floor) is quoted around 36.5/38.5 today. That’s essentially unchanged from levels yesterday, but note that the loan has drifted down from the low 40s since the company disclosed the exchange offers in an SEC filing in late January. As at Dec. 31, there was $1.165 billion outstanding under the loan.

Over in the bond market, the aforementioned 6.5% senior notes due September 2020 were quoted unchanged in a 5.75–6.25 range, according to sources.

As of March 11, 2016, Peabody’s available liquidity declined to $0.9 billion, which consisted primarily of cash and cash equivalents, according to filings.

As reported, Peabody in February accessed the remaining $825 million available under its $1.625 billion revolver to maintain flexibility.

Falling demand and depressed prices have left highly leveraged companies tied to the coal-mining sector struggling to service their debt loads, with Arch Coal, Alpha Natural Resources, Walter Energy, and Patriot Coal, among others, filing for Chapter 11 in the past year. Competing coal miner Foresight Energy on Tuesday warned that it may seek Chapter 11 bankruptcy protection, while Cliffs Natural Resources recently completed a distressed exchange offer in an effort to shave almost $300 million from its debt pile. — Staff reports

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Fridson: High Yield Had a Pretty Good Year Last Month (as in 166% Annualized Return)

How much has risk appetite rebounded in the U.S. capital markets of late? LCD’s Marty Fridson sums it up nicely, focusing, as he does, on a particular asset class.

“The high-yield bond market had a pretty good year over the past month. From a low point on Feb. 11, when it stood at 867 bps, the BofA Merrill Lynch US High Yield Index’s option-adjusted spread (OAS) tightened to 682 bps on March 11. In that span, the index’s total return was 8.08%.

“To put the high-yield market’s month-long performance in perspective, the mean return for all full calendar years since the index’s inception is 9.09%. If the Feb. 11 to March 11 period were a calendar month, it would rank third in total return among all months of the BAML High Yield Index’s history. The 8.08% return annualizes to an astounding 165.75%.”

Of course, one month does not a year make, and, as Fridson points out in his analysis, realizing the type of gain detailed above means that an investor would have had to accept the full risk of owning the full high yield universe.

That would include a host of names in the ailing energy and commodities industries, whose performance (and spreads) over the past few quarters were more indicative of a distressed debt portfolio, as opposed to high yield proper. – Tim Cross

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Clean Harbors $250M High Yield Offering Prices to Yield 5.07%

Clean Harbors today completed an add-on offering of 5.125% senior notes via Goldman Sachs as the sole bookrunner. Terms on the BB+/Ba2 transaction were finalized at the tight end of guidance after a $50 million upsizing, to $250 million, putting the total outstanding in the series to $850 million. As reported, proceeds from the company’s return to market after over three years will be used to finance potential future acquisitions, and for general corporate purposes. Clean Harbors is a provider of environmental, energy, and industrial services throughout North America. Terms:

Issuer Clean Harbors
Ratings BB+/Ba2
Amount $250 million
Issue add-on senior notes (144A)
Coupon 5.125%
Price 100.25
Yield 5.068%
Spread T+359
Maturity June 1, 2021
Call nc6mo @ par+50% coupon (orig. nc4)
Trade March 14, 2016
Settle March 17, 2016 (T+3)
Joint Bookrunners GS
Px talk par area
Notes upsized by $50 million; total now $850 million; original $600 million priced in November 2012 @ par.

 

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here


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The Fresh Market eyes secured bonds in Apollo-backed take-private transaction

Barclays, Royal Bank of Canada, Jefferies, and Macquarie have committed to provide debt financing to back Apollo Global Management’s $1.36 billion take-private of specialty grocery retailer The Fresh Market, which was announced today. The deal would be funded with $800 million of senior secured notes, while The Fresh Market would also place a $100 million revolving credit, according to the company.

The sponsor would contribute $525 million of cash equity to the transaction, along with rollover equity from Ray Berry and Brett Berry, who collectively own approximately 9.8% of The Fresh Market’s outstanding shares.

The $28.50 per share all-cash offer by Apollo represents a premium of approximately 24% over The Fresh Market’s closing share price on March 11, 2016, and a premium of approximately 53% over the Feb. 10, 2016 closing share price, the day prior to press speculation regarding a potential transaction.

The transaction includes a 21-day go-shop period that would lapse on April 1.

As of March 14, 2016, the company operates 186 stores in 27 states across the U.S. — Staff reports

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Bankruptcy: Caesars Adequacy Hearing Ch. 11 on Shaky Ground Ahead of Examiner Report

The motion of Caesars Entertainment Operating Co. (CEOC) to schedule a hearing on the adequacy of the company’s proposed disclosure statement for May 9 came under fire from key stakeholder groups in the company’s Chapter 11 proceedings this week, who argued that the company’s proposed schedule would not provide enough time to respond to the shake-up in the case that creditors anticipate will follow the filing of the examiner’s report.

As reported, the court appointed examiner, New York–based attorney Richard Davis, is investigating, among other things, whether the transactions undertaken by the company and its parent, Caesars Entertainment Corp. (CEC), in the year and a half prior to the Chapter 11 filing are avoidable either as preferential transactions or fraudulent conveyances.

Davis has said he would file his report by March 14 at the latest.

The resolutions of the disputes that Davis is probing are expected to ultimately determine recoveries for the company’s creditors, most directly the company’s second-lien and unsecured creditors who contend that if the transferred assets at the heart of the investigation are deemed to be available to satisfy their claims, their recoveries would be greatly increased over the current deal on the table.

Senior lenders would presumably see their recoveries altered, as well, in kind if not in amount, as the structure of the company’s proposed plan would likely change.

Beyond the four corners of CEOC’s Chapter 11, Davis’ findings would also potentially have a negative effect on CEC’s stock price, to the extent that CEC’s assets are used to satisfy claims against CEOC.

The company and CEC, for their part, have been to seeking to block pending litigation in federal court in New York and Delaware challenging the CEC transactions, in the hopes that the company could confirm reorganization plan before an adverse decision is rendered.

As reported, CEOC’s Chapter 11 filing last January halted the litigation against it, but the cases were allowed to proceed against CEC, which was not part of the Chapter 11 filing. That put pressure on the parent—indeed, CEC warned that if the lawsuits were allowed to go forward, it could be forced to file Chapter 11 as well—to contribute funding to a CEOC reorganization plan that could be used for distributions to junior creditors, but the company has been unable to meet the demands of second-lien and unsecured creditors, especially given the potential payday that awaits if they prevail in the pending lawsuits.

The dynamic changed last month, however, when the bankruptcy court issued a temporary injunction blocking the New York case, which was ready to go to go to trial, from moving forward, at least through May 9, in order to give the parties in the CEOC Chapter 11 time to reach a consensual resolution following the filing of Davis’ report.

Broadly, Davis’s report is expected to provide an impartial assessment of the relative strengths of the competing legal arguments among the parties in the asset transfer disputes, and is widely seen as the key to a consensual reorganization plan.

As reported, the company last week named a former federal judge from Delaware, Joseph Farnan, Jr., to oversee mediation in the case once Davis’ report is filed.

Against this backdrop, the company asked the bankruptcy court last week to set a disclosure statement hearing for May 9 and a plan confirmation hearing for Aug. 15 in order to “position these cases—whether on a fully consensual basis or not—[to confirm a plan] within the exclusivity periods.” In order to meet that schedule, the company said it would file a potentially revised reorganization plan and disclosure statement by April 4.

The company has the exclusive right to propose a reorganization plan through July 15, and a corresponding exclusive right to solicit acceptances to a plan through Sept. 17. Those deadlines are the maximum exclusivity periods permitted under the Bankruptcy Code.

1,000 pages
While none of the stakeholder responses to the company’s proposed timetable gave an indication of specific conclusions Davis might have reached in his report, they do suggest that Davis’ report will be substantial, and will require a renegotiation of the existing reorganization plan.

The stakeholders say, further, that the company’s proposed schedule would not provide them with enough time, given the complexity of the issues in the case and the volume of evidence, to digest the report’s contents and develop that new reorganization plan.

According to the unsecured creditors’ committee, Davis’ report is expected to be 1,000 pages long.

The official committee of second-lien lenders argued, “Before any party has even had the chance to review the relevant plan and related disclosure statement, the debtors ask the court to impose a severely-constrained (and admittedly ‘somewhat unusual’) timetable that, among other things, would provide parties with the bare minimum of twenty-eight days to assess and object to a massive disclosure document that will include brand new information regarding the examiner’s report (which has not been issued), the recommendation of the governance committee concerning the appropriateness of the agreements previously negotiated with CEC, the governance committee’s report on its investigation (the results of which have not been disclosed), and the “marketing” process orchestrated to enable the Debtors to proceed with an adversarial ‘new value’ plan, not to mention revisions to the plan resulting from those critical new developments.”

Meanwhile, the indenture trustee for the company’s unsecured notes argued that the compressed timetable would not only fail to provide enough time to reach a deal, the setting of such a restricted deadline would make consensus more difficult to reach from the get-go.

“The relief sought by the debtors in the motion could, in fact, hinder the prospects for peace at the outset,” the trustee, Wilmington Trust, argued. “The motion seeks to require all parties to participate in a highly-compressed timetable for litigation concerning approval of the debtors’ proposed disclosure statement and plan. To have the greatest chance of success, mediation will require the full attention and resources of all participating parties. Requiring all parties to prepare for, and engage in, litigation about plan issues while attempting to reach consensus on that plan will discourage the constructive engagement that mediation requires.”

With friends like these…
In evaluating the opposition of the second-lien lenders and unsecured noteholders to the company’s timetable, it is worth noting that they are the very same parties that are litigating with the company over the challenged CEC transactions, and that their recoveries would be most directly determined by the outcome of the litigation.

In short, their opposition to a compressed confirmation is to be expected.

Perhaps more concerning for the prospects of the company’s proposed reorganization plan, and the company’s hopes of potentially pushing through a non-consensual reorganization plan ahead of the New York and Delaware litigation, if necessary, is the fact that the company’s first-lien lenders and first-lien noteholders, groups that have provided long-standing backing to the company throughout the Chapter 11 case, appear ready to jump ship as well.

The ad hoc committee of first-lien noteholders, for example, said that “the considerable delays in these cases and the weakening in the debt and equity markets since negotiation (and renegotiation) of [their RSA with the company] have caused a very substantial decline in the value of the debt and equity securities proposed to be distributed to the first lien noteholders thereunder.”

The ad hoc panel said the decline in the bond and equity securities, which “comprise a majority of first lien noteholder recoveries, … will have a material adverse impact upon the value of the total consideration first lien noteholders were to have received.”

Noting that a number of milestone deadlines in the Noteholder RSA have already been missed, the ad hoc panel said it has informed the company that unless the RSA is “amended promptly to, among other things, adequately address, and correct for, the significant value lost in the debt and equity securities contemplated to be issued to the first lien noteholders, the milestones in the RSA will not be extended, exposing the RSA to potential termination.”

The ad hoc group said that it would make “little sense” to go forward with a disclosure statement hearing because it would not be “at all efficient to initiate a plan solicitation process where the definitive first lien noteholder support for the underlying plan is no longer in hand.”

Similarly, the ad hoc committee of first-lien bank lenders—the creditor constituency most firmly in the company’s corner to date—also balked at the company’s proposed timetable.

“As the ad hoc bank lender committee has previously stated in its filings with the court, given the continual delay in these cases, the lack of progress in negotiations with other junior constituents, and the state of the credit markets, the likelihood that the Bank RSA in its current form can continue to form the foundation for a consensual plan of reorganization in these cases has vastly diminished.”

Notably, the bank panel said, the company has already missed certain milestone deadlines under the Bank RSA, “and the … committee has not agreed to any extension of the milestone or waiver of the default related thereto.”

Among the concerns raised by the bank lenders is that they may be forced to object to the revised reorganization plan that emerges following Davis’ report, and the proposed time limits “are far too short to be practicable.” — Alan Zimmerman

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Bankruptcy: Sports Authority unsecured creditors’ committee appointed

The U.S. Trustee for the bankruptcy court in Wilmington, Del., has appointed an unsecured creditors’ committee in the Chapter 11 proceedings of Sports Authority. — Alan Zimmerman

The members of the committee and their contact information are as follows:

  • TCW/Crescent Mezzanine Partners (Attn: Elizabeth Ko, 310-235-5973)
  • New York Life Investment Management Mezzanine Partners (Attn: Thomas Haubenstricker, Vijay Palkar & Lorne Smith, 212-576-6500)
  • Stitching Pensioenfonds ABP (Attn: M. Rademakers, AlpInvest Partners, Amsterdam, The Netherlands, +31 20 540 7575)
  • Nike, Inc. (Attn: Kim Stewart, 503-532-7856)
  • Asics America Corp. (Attn: Mark Schollaert, 949-727-7165)
  • GGP Limited Partnership (Attn: Julie Minnick Bowden, 312-960-2707)
  • Realty Income Corp. (Attn: Kirk R. Carson, Esq., 858-284-5256)

 

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.
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Distressed Debt: Affinion, Linn Energy, Peabody, W&T Offshore join Restructuring Watchlist

Four issuers joined LCD’s Restructuring Watchlist last week, bringing the total number of issues on the list to 40, according to S&P Global Market Intelligence LCD.

Joining the list:

  • Customer loyalty concern Affinion Group, which posted a drop in fourth-quarter revenue and forecasted a decline for 2016. Affinion is controlled by Apollo Management.
  • Linn Energy, which delayed filing an annual report, saying it needed additional time to disclose concerns about debt covenants
  • Coal miner Peabody Energy, which issued a going-concern warning
  • W&T Offshore, which drew down most of what was remaining on the company’s revolving credit line, prompting a downgrade by S&P to CCC-

Three of those names might sound familiar: Affinion, Linn, and Peabody already have been on the list at one time or another, each returning this week.

Nearly half of the Watchlist – 19 issuers – comprises energy companies proper (such as oil & gas), while three are mining/commodities concerns.

This distressed debt activity comes as the U.S. leveraged loan default rateincreased to a still relatively low 1.45% in February, from 1.33% in January, according to LCD’s Steve Miller. Noranda Aluminum and Paragon Offshore were the two leveraged loan issuers to default last month, according to LCD.

loan v bond distress ratio

More broadly, S&P puts the 2016 Global corporate default count at 22 issuers through February, compared to 17 by that time in 2015.

LCD’s Restructuring Watchlist tracks companies with recent credit defaults or downgrades into junk territory, issuers with debt trading at deeply distressed levels, as well as those that have recently hired restructuring advisors or entered into credit negotiations. It is compiled by Matt Fuller. It is published each week in LCD’s Distressed Weekly.

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