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High yield bond funds see fifth straight investor cash inflow ($573M)

high yield bond flows

Retail-cash inflows to high-yield funds totaled $573 million in the week ended March 12, according to Lipper. This is the fifth consecutive inflow, for a net infusion of $3.95 billion over that span.

The ETF segment moderated its influence this past week, at 28% of the total, or $159 million, versus 65% of the $560 million inflow last week.

Despite another solid inflow, the trailing four-week average slips to positive $624 million per week, from positive $844 million last week. The trailing average was positive $461 million per week two weeks ago.

The full-year reading shows inflows of $2.6 billion, comprised of $2.3 billion of mutual fund inflows and $216 million of ETF inflows, or 8% of the sum.

One year ago at this time, the inflow total stood at $279 million, with a breakdown of $877 million of mutual fund inflows offset by roughly $598 million of ETF outflows.

The change due to market conditions was negative this past week, at $615 million, putting total assets at $181.9 billion, of which 20% is tied to ETFs, or $36.6 billion. Total assets are up $4.3 billion in the year to date, or a gain of roughly 3% this year.

In the full-year 2013, inflows were $1.9 billion, with ETF inflows comprising 85% of the total, at $1.6 billion.

Net assets were up $9.8 billion in 2013, a gain of 6%. The change due to market conditions was positive $12.6 billion, a gain of 8%, according to Lipper. – Matt Fuller

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Bankruptcy: Ergen says new $1.65B LightSquared DIP constitutes sub rosa plan

LightSquared’s latest proposed debtor-in-possession credit facility constitutes a sub rosa plan, “conceived in bad faith” as a way to force through a reorganization plan that discriminates against the company’s largest secured lender, SP Special Opportunities, according to an objection filed late Wednesday by SPSO.

LightSquared is seeking bankruptcy court approval of a new $1.65 billion DIP facility, priced at L+1,100, with a 1% LIBOR floor, as part of its latest proposed reorganization plan. The new DIP, arranged by joint bookrunners JP Morgan and Credit Suisse, would pay off claims on the company’s two outstanding DIPs, a $72.36 million DIP for LightSquared Inc. and $33.7 million on the recently approved new DIP for LightSquared LP (see “LightSquared may tap new $33M DIP from senior lenders, Ergen,” LCD News, Feb. 4, 2014). About $930 million of the new DIP would be converted into second-lien exit financing, $300 million into a loan for reorganized LightSquared Inc., and about $115 million into new equity.

SPSO, the special purpose vehicle set up by Dish Networks founder Charles Ergen to purchase about $1 billion of LightSquared’s senior debt, is the only major creditor to have voted against LightSquared’s current reorganization plan (see “LightSquared creditors all vote in favor of plan, except for Ergen,” LCD News, March 7, 2014). Although the plan purports to repay SPSO in full, LightSquared is attempting to subordinate SPSO’s claims and repay the fund via a seven-year paid-in-kind note – treatment that SPSO has said is unacceptable.

“The DIP facility, like the unconfirmable plan, reflects the obvious motive of the DIP lenders: protect themselves from the massive risks attendant to being a stakeholder of a company whose assets nobody wants, and that has made no demonstrable progress in obtaining the FCC relief on which its future purportedly hinges,” lawyers for SPSO wrote in their March 12 objection. LightSquared has long maintained that its success as a business depends on FCC approval of its proposed wireless spectrum use, though the latest version of the company’s reorganization plan removes an earlier requirement that the company receive FCC approval before it can exit Chapter 11.

“Instead, the DIP lenders – all of whom currently hold deeply subordinated positions in the debtors’ capital structure and were the driving force behind the plan’s formulation – propose to shift that risk to SPSO, the debtors’ largest secured creditor, by subordinating SPSO’s first lien prepetition LP facility claims to $1.65 billion of debt immediately upon funding of the DIP facility, and ultimately to $2.2 to $3.2 billion of debt (if not more) once the plan becomes effective,” SPSO said. “In contrast, for their “investments” in the debtors, the DIP lenders would receive (a) downside protection in the form of priming or senior liens (under the DIP facility and second lien exit facility) to secure their new money loans, and (b) upside in the form of the reorganized debtors’ equity once the plan becomes effective. Uncomfortable with a legitimate equity investment given the substantial uncertainty about the debtors’ future viability, the DIP lenders orchestrated a transaction that would allow them to have their cake and eat it too.”

Among other things, SPSO argues Judge Shelley Chapman must reject the DIP because it was never marketed, and LightSquared has failed to show that alternative, less onerous financing is unavailable, as required under the Bankruptcy Code. What’s more, LightSquared can’t show that SPSO’s liens will be adequately protected after the company incurs $1.65 billion of priming financing, SPSO says. Under the proposed plan, SPSO is exposed to the risk that the value of its collateral will shrink long before its note is paid off, its lawyers say.

“Leaving aside anything “technical,” the debtors have pursued a plan of reorganization with no back up plan and exhausted all of their liquidity doing so,” SPSO says. “As a result, being a lender to LightSquared these days is anything but a sure thing.”

SPSO and LightSquared are due back in court on March 17 for closing arguments in a related battle over the validity of SPSO’s purchase of LightSquared debt. The hearing had been scheduled for March 12, but was postponed after LightSquared revealed new evidence Monday allegedly showing that Dish Networks was interested in LightSquared’s spectrum as early as 2012. The evidence purportedly contradicts Ergen’s previous testimony that he was interested in LightSquared purely as a personal investment. Ergen spent nearly $1 billion of his own money to make the purchases, via SPSO, buying up LightSquared debt from roughly May 2012 to May 2013. Dish Networks, as a competitor to LightSquared, was barred from making such purchases under the terms of LightSquared debt indentures.

A confirmation hearing on LightSquared’s plan is currently scheduled for March 19. – John Bringardner

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United Rentals completes $1.375B 2-part bond offering at middle of talk

United Rentals this afternoon completed its two-part offering of senior notes via bookrunners Morgan Stanley, Bank of America, Wells Fargo, Citi, Barclays, Credit Suisse, and Deutsche Bank, according to sources. Terms were finalized at the midpoint of talk on both tranches. Proceeds will be used to finance in part the cash portion of the purchase price of the National Pump Acquisition and redeem $500 million of the 9.25% senior notes due 2019. Terms:

Issuer United Rentals
Ratings BB-/B2
Amount $525 million
Issue senior add-on (SEC Reg.)
Coupon 6.125%
Price 105.25
Yield 5.188%
Spread T+305
Maturity June 15, 2023
Call nc3.5
Trade March 12,2014
Settle March 26, 2014 (T+10)
Lead Books MS/BAML/WF/Citi/Barc/CS/DB
Co’s. Scotia/HSBC/MIT/JPM
Px talk 105.25 area
Issuer United Rentals
Ratings BB-/B2
Amount $850 million
Issue senior (SEC Reg.)
Coupon 5.75%
Price 100
Yield 5.75%
Spread T+306
Maturity Nov. 15, 2024
Call nc5
Trade March 12,2014
Settle March 26, 2014 (T+10)
Lead Books MS/BAML/WF/Citi/Barc/CS/DB
Co’s. Scotia/HSBC/MIT/JPM
Px talk 5.75% area
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Global Ship Lease high yield bonds price to yield 10.392%; terms

global ship lease logoGlobal Ship Lease this afternoon completed an offering of secured notes via sole bookrunner Citigroup, according to sources. Terms were finalized at the midpoint of talk, following a $20 million upsizing. Timing was also moved up a day. Proceeds will be used to refinance debt, and to terminate interest-rate swaps. The company previously attempted to access the market for its debut offering in December but withdrew the deal, citing “market conditions.” Price talk for that deal was in the 9.5% area for a $400 million offering of seven-year (non-call three) secured notes. Terms:

Issuer Global Ship Lease
Ratings B/B3
Amount $420 million
Issue first-priority secured (144A)
Coupon 10.00%
Price 98.5
Yield 10.392%
Spread T+878
Maturity April 1, 2019
Call nc2
Trade March 11, 2014
Settle March 19, 2014 (T+6)
Lead Books Citi
Px talk 10% coupon at 98.5 OID
Notes Upsized by $20 million.

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Cornerstone Chemical plans $75M PIK toggle high yield bond offering

cornerstone chemicalCornerstone Chemical has entered the market with a $75 million offering of senior PIK toggle notes due 2018 via sole bookrunner Imperial Capital, according to sources.

A roadshow for the deal starts today in New York, with pricing expected early next week. The deal is being issued through holding companies H.I.G BBC Intermediate Holdings and H.I.G. BBC Holding Corp. under Rule 144A for life, according to sources.

Proceeds from the unrated deal, callable in one year at 102% of par, will be used to pay a cash dividend to shareholders and fund a debt service reserve account. The company’s opco notes are rated B-/B3-, with the company maintaining a corporate rating of B-/B2.

The offering is a fourth PIK-toggle dividend deal this year, following BlueLine Rental, American Greetings, and Ancestry.com, for a combined $628 million in proceeds. Last year there were 30 such transactions in market for a net $11.6 billion and nearly double the 19 completed in 2012 totaling $6.2 billion, according to LCD.

The opco notes were Cornerstone’s last tap of the market, priced just over a year ago. That issued was sold at par to yield 9.375%, via Imperial Capital and KeyBanc, and is currently trading at 106 for a yield of 7.4%, according to S&P Capital IQ. Proceeds from the five-year secured issue were also used to fund a dividend to shareholders and to refinance existing debt.

Cornerstone Chemical is a Louisiana-based producer of critical intermediate and specialty chemicals. H.I.G. Capital is the sponsor, according to S&P Capital IQ. – Joy Ferguson

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Bankruptcy: U.S. Trustee objects to exec bonuses under proposed plan by Cengage

cengage logoThe U.S. Trustee for the bankruptcy court in Brooklyn objected to Cengage Learning’s proposed reorganization plan, arguing that an included management incentive plan upon emergence from Chapter 11 violates provisions of the Bankruptcy Code that limit the payment of bonuses to insiders.

As reported, a confirmation hearing on the largely consensual reorganization plan is scheduled for March 13.

According to the objection filed yesterday by U.S Trustee William Harrington, the proposed management incentive plan runs afoul of the Bankruptcy Code because it, “in effect, rewards the [company’s] executives with stock and stock options potentially worth over $10 million for remaining in their positions during the Chapter 11 case, rather than awarding bonuses prospectively if the executives meet performance targets set by the new board of directors.” According to Harrington, the company is seeking approval of the bonus payments in the context of confirmation, rather than via a motion to the Bankruptcy Court, in an effort to “circumvent the strict standards” in the Bankruptcy Code that seek to prevent excessive executive compensation during a Chapter 11 case.

Under the proposed MIP, which, under the reorganization plan, the company’s new board is required to adopt upon emergence, executives are to receive 5.6% of the reorganized equity valued at about $10 million (comprised 60% of incentive options and 40% restructured stock units). CEO Michael Hanson would receive 50% of that aggregate award amount, while eight other executives and a new CFO would split the other 50%. Under the plan, 80% of the awards, with a value of $8 million, would be distributed on the date the company emerges from Chapter 11.

In effect, Harrington argues, this scheme rewards the company’s executives for simply remaining with the firm during the bankruptcy, an incentive which the Bankruptcy Code specifically prohibits unless certain requirements are satisfied, such as paying a retention incentive only when an executive has already received a competing offer from a different firm.

Harrington further argues that the MIP would undermine the company’s new board of directors, since it would obligate the company to “distribute potentially $10 million in value to insiders prior to the formation of the new board of directors,” depriving the new board and the reorganized company of “corporate governance procedural protections” and precluding the board “from exercising its fiduciary duty.”

Separately, Harrington contends that a proposed severance payment provided for in the company’s reorganization plan for CFO Dean Durbin also violates the Bankruptcy Code prohibition against payments to insiders.

The company only first disclosed its intent to part ways with Durbin in its recently filed reorganization plan supplement, Harrington notes.

According to Durbin’s severance agreement, he is to receive his $600,000 salary for one year after separation from the company plus his pro rata distribution of any bonus he would have received had he remained in the company’s employ.

Harrington is not seeking to block confirmation of the company’s proposed reorganization plan, but he is asking the bankruptcy court to, among other things, deny approval of the MIP. – Alan Zimmerman

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Bankruptcy: LightSquared creditors all vote in favor of plan, except for Ergen

All of LightSquared’s creditors voted in favor of the company’s proposed reorganization plan, except for Charles Ergen’s SP Special Opportunities fund, whose roughly $920 million in LP facility claims LightSquared lawyers have asked the bankruptcy court to designate.

Creditors were given until March 3 to vote on the latest version of LightSquared’s plan. The claims agent in the case filed the results with the court this afternoon, showing, as expected, widespread support for the plan aside from SPSO, which is in the midst of litigation to determine whether Ergen’s fund legally acquired the claims in the first place. (see “Charles Ergen’s ‘deceit’ sabotaged LightSquared reorg, company says,” LCD News, Feb. 15, 2014).

Earlier this week, LightSquared filed a motion asking Judge Shelley Chapman to override SPSO’s no vote, arguing that it was not made in good faith, a requirement of the Bankruptcy Code. (see “LightSquared asks court to force Ergen to vote in favor of plan,” LCD News, March 4, 2014). SP Special Opportunities, a special-purpose vehicle the DISH Networks founder set up to purchase more than $1 billion in claims on LightSquared’s senior debt, was created as part of a “comprehensive and premeditated plan to acquire LightSquared’s spectrum,” the company said in a court filing late Monday. “By voting to reject the plan, SPSO seeks to further the interests of the Ergen parties and to facilitate their business strategy of acquiring spectrum assets.”

The success of the plan, in its current form, depends on a “yes” vote from SPSO, whether voluntary or designated.

The vote-designation motion was expected. LightSquared’s lawyers have said in recent court hearings they intended to file the motion as part of the company’s latest reorganization plan. Lawyers for SPSO and Ergen, who have vehemently opposed LightSquared’s accusations, must file their official response to the vote-designation motion by March 11. A hearing on the motion, and on LightSquared’s plan, is currently scheduled for March 17, before U.S. Bankruptcy Judge Shelley Chapman.

Meanwhile, closing arguments in LightSquared’s adversary proceeding against Ergen are scheduled for March 12, in Manhattan. – John Bringardner


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Select Medical add-on high yield bonds (B-/B3) price at 101.5 to yield 6.03%

Select Medical this afternoon completed an add-on to its 6.375% senior notes due 2021 through bookrunners J.P. Morgan, Goldman Sachs, Bank of America, Morgan Stanley, RBC, and Wells Fargo, according to sources. Terms were finalized at the tight end of guidance. Proceeds will be used to fund a share repurchase from sponsor Welsh Carson Anderson & Stowe. The add-on will be fungible upon registration with the $600 million already outstanding. Terms:

Issuer Select Medical
Ratings B-/B3
Amount $110 million
Issue add-on senior notes (144a)
Coupon 6.375%
Price 101.5
Yield 6.033%
Spread T+447
Maturity June 1, 2021
Call nc2.25 @ par+75% coupon
Trade March 6, 2014
Settle March 11, 2014 (t+3)
Lead Books JPM/GS/BAML/MS/RBC/WF
Px talk 101-101.50
Notes first call par+75% coupon; total now $710 million; original $600 million priced in May 2013 @par.

 

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Dewey & LeBoeuf execs face fraud charges from SEC, Manhattan DA

Dewey logoFormer Dewey & LeBoeuf executives Steven Davis, Stephen DiCarmine, and Joel Sanders could face up to 25 years in prison, Manhattan District Attorney Cyrus Vance said this morning, at a press conference where he announced charges of grand larceny and fraud that helped drive the international law firm into a 2012 Chapter 11 liquidation.

The charges are the result of a nearly two-year investigation by the DA’s office, in conjunction with the FBI, after partners at Dewey first raised concerns with law enforcement. The SEC conducted a parallel investigation and announced its own charges this morning. Davis, Dewey’s former chairman, DiCarmine, the former executive director, and Sanders, the former CFO, were taken into custody this morning, along with former client relations manager Zachary Warren. Another seven unidentified Dewey finance professionals have pleaded guilty to charges of falsifying business records, Vance said.

“The defendants are accused of concocting and overseeing a massive effort to cook the books at Dewey & LeBoeuf,” Vance said. “Their wrongdoing contributed to the collapse of a prestigious international law firm, which forced thousands of people out of jobs and left creditors holding the bag on hundreds of millions of dollars owed to them. Those at the top of the firm directed employees to hide the firm’s true financial condition from creditors, investors, auditors, and even partners of the firm, until the scheme unraveled and resulted in the largest law firm bankruptcy in history.”

Dewey filed for Chapter 11 protection on May 28, 2012, to liquidate and wind-up operations after a credit crunch at the end of 2011 kicked off a wave of partner defections that forced the firm into bankruptcy. The Chapter 11 proceedings were quick and smooth, at least according to standards set by the prior bankruptcies of large law firms. Judge Martin Glenn confirmed a liquidation plan in February 2013 that promised secured creditors an estimated 47-77 cents on the dollar. Unsecured creditors – the “limo drivers and food service staff,” as Vance characterized them today – were expected to see a return of just 5-14 cents on the dollar for their claims. The plan created a liquidation trust to pursue remaining funds for creditors.

SEC Division of Enforcement Direct Andrew Ceresney said this morning that Dewey executives used “a grab bag of accounting gimmicks” to show investors the firm had weathered the financial storm in order to sell $150 million in bonds. “It’s extremely rare for a law firm to access the public bond markets,” Ceresney said, but Dewey did so using false information to mislead investors. The SEC is seeking disgorgement of firm profits and the permanent disbarment of Davis and DiCarmine. At least one original investor still holds Dewey debt, Ceresney said.

From Dewey’s formation in 2007 – the result of a merger between two prestigious firms, Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae – until early 2010, the firm had both term debt and revolving debt. By the end of 2008, Dewey had more than $100 million in term debt outstanding and available lines of credit of more than $130 million, Ceresney said. The firm refinanced its debt in April 2010 with a $150 million private placement with 13 insurance companies, and a $100 million revolving line of credit with a syndicate of banks. The DA’s office has accused Davis, DiCarmine, and Sanders of stealing nearly $200 million from these investors through fraudulent adjustments of firm financials. Among other things, Dewey’s offering memorandum falsely purported to disclose all of the firm’s debt, the DA’s office said.

The DA cited internal firm emails between Davis and Sanders in the midst of the alleged fraud, regarding the retirement of a firm auditor at Ernst & Young. “Can you find another clueless auditor for next year?” Davis wrote to Sanders. – John Bringardner

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Bankruptcy: Atlantic Express wins exclusivity extension to plan liquidation

U.S. Bankruptcy Judge Sean Lane granted private-bus operator Atlantic Express a 60-day extension of its exclusive right to file and solicit votes on a Chapter 11 liquidation plan, through May 5 and July 7, respectively, according to a court order signed Tuesday.

The company, identified in court filings as Metro Affiliates, is still in the process of selling off its assets and formulating its liquidation plan. Since filing for Chapter 11 on Nov. 4, 2013, the company has entered into 20 separate sale transactions with various purchasers, Atlantic Express said last month. The company entered bankruptcy hoping to raise new debt or equity financing, but a union rejection of its proposal to cut employee wages nixed chances for a restructuring (see “Atlantic Express union nixes new proposal; asset sales on tap next,” LCD News, Dec. 6, 2013). – John Bringardner