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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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Town Sports Rating Cut to Selective Default on Sub-Par TLB Repurchases

Standard & Poor’s Ratings Services today cut Town Sports International’s corporate rating to Select Default (SD), from B–, in light of sub-par repurchases of its term loan that it deems the equivalent of a distressed restructuring and tantamount to a default. The rating agency also lowered its rating on the term loan to D, from B–,

Town Sports disclosed in its 10-K filing late yesterday that TSI Holdings in December repurchased $29.8 million (face amount) of its term loan for $10.9 million, which works out to an average price of about approximately 37 cents on the dollar. The repurchased debt has since been retired.

As of Dec. 31, there was $275.4 million outstanding under the originally $325 million covenant-lite term loan (L+350, 1% LIBOR floor), which is quoted at 39/43 today, up a point from yesterday, according to sources.

As reported, the Nasdaq-listed fitness-club operator in early 2015 inked an amendment that permits the holding company to make open-market purchases of the term loan. For reference, the 2013-vintage credit agreement originally included language that allows the company to execute sub-par buybacks via a Dutch auction.

S&P noted that while it generally does not view secondary market repurchases as a distressed restructuring when they are executed in a liquid market, the rating agency said that “the market for Town Sports’ term loan is relatively illiquid, meaning that investors in the term loan have limited options for exit and sellers of the debt may have sold at a deep discount to avoid holding debt in bankruptcy or through a conventional default.” The rating agency cited other reasons for counting this as a distressed restructuring, among them the steep discount to par at which the debt was repurchased; that its “operations are troubled and undergoing a turnaround transition;” its negative free cash flow; and that its market capitalization is below its cash balance at year-end.

Even with today’s 66% surge on its stock price on its fourth-quarter results, the company’s market capitalization is about $48 billion, versus cash of about $76 million. For the fourth quarter, adjusted EBITDA was about $10 million, above the S&P Global Market Intelligence consensus estimate for $4.5 million and up 52.3% from the third quarter. The company attributed the improvement to strong cost controls and its “intense focus on unit level economics.”

Adjusted EBITDA for the full-year 2015, was $28.85 billion, versus $53.16 billion in 2014, while full-year revenue fell to $424.3 million, from $453.8 million in 2014.

Town Sports said in its 10-K filing it “may consider additional actions within its control, including asset sales, additional club closures and entering into arrangements with revenue generating partnerships,” as well as additional strategic alternatives including opportunities to reduce its debt and cut costs.

The capital structure also includes a $45 million revolver due November 2018, though the company cannot currently utilize more than 25% of the borrowing capacity since the facility is governed by a 4.5x springing leverage test, SEC filings show. The company said that in light of its $76.2 million cash balance as of Dec. 31 and projected cash from operations, it does not expect to need to tap its revolver this year.

Moody’s rates both the issuer and the loan at Caa2. — Kerry Kantin

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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AMC Entertainment bonds slip on plans for debt-financed Carmike buy

AMC Entertainment today announced plans to buy rival Carmike Cinemas for $1.1 billion, at $30 per share in cash, including the assumption of the Carmike debt. Debt financing commitments are already in place via Citi, according to a company statement.

Given the incremental debt, AMC bonds slipped on the news. The 5.875% notes due 2022 shed roughly 1.5 points, to 102.75/103.75, while the 5.75% notes due 2025 dipped half of a point, to 103/104, according to sources. Neither is trading actively on the news, with just odd lots reported thus far, at 102.938 and 103, respectively, trade data show.

Carmike bonds were steady, including the 6% notes due 2023, at 105/106, according to sources.

Despite weakness in the bond market related to the additional debt, shares of both theater operators were modestly higher this morning on the news. AMC stock traded up approximately 3.6%, at $26.44, while Carmike stock surged roughly 17%, to $29.32.

Under terms of the agreement announced this morning, the deal values Carmike at roughly $376,000 per screen, according to the statement. The transaction has already been approved by both corporate boards, and closing is expected by the end of the year.

In addition to providing the debt commitment, Citi is serving as exclusive financial advisor to AMC, while Husch Blackwell is serving as AMC’s lead legal advisor, according to the company. As for Carmike, J.P. Morgan is serving as exclusive financial advisor, and King & Spalding is legal counsel, the filing showed.

AMC was last in market in June with the $600 million issue of 5.75% subordinated notes as part of a plain-vanilla bond-refinancing effort via lead bookrunner Citi. Ratings were B/B3 at offer, but an upgrade to the current profile of B/B2 was linked to “a meaningful improvement in leverage,” according to Moody’s. — Matt Fuller

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Investors Pour Record $5B Into US High Yield Bond Funds

U.S. high-yield funds recorded a record inflow of $4.97 billion in the week ended March 2, surpassing the previous high-water mark of $4.25 billion in the week ended Oct. 26, 2011. This is a third consecutive inflow for a net infusion of $7.77 billion over that span.

ETFs laid solid influence, at 47% of the inflow. Last week’s $2.74 billion was similarly weighted, at 46% ETF-related.

high yield flows

With the record inflow this week, the trailing-four-week average surges to positive $1.68 billion for the week, from positive $429 million last week, which itself was in the black for the first time in 14 weeks.

With a stunning inflow, the year-to-date figure flips back into positive territory, at $2.61 billion, but with a whopping 77% related to the ETF segment. Whatever that might say about fast money, market timing, and hedging strategies, it’s the first positive reading this year. For comparison, the same period in 2015 saw inflows of $11.12 billion with ETFs accounting for 38%.

In addition to the gigantic positive cash flow, the change due to market conditions over the past week was positive $5.24 billion, or roughly 3% of total assets, which were $181 billion at the end of the observation period, with 20% ETF-related. This too, is an all-time high for this change-in-market-value metric as the secondary rallied hard this past week. — Matt Fuller

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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.

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S&P: 22 Corporate Defaults Globally in 2016; Commodities Still Lead Pack

global defaults

Two corporate issuers defaulted this week, a Russia-based bank and U.S. oil and gas co. Chaparral Energy, raising the global corporate default tally to 22 issuers so far in 2016, according to S&P Global Fixed Income Research.

By contrast, there were 17 defaults at this time in 2015. The full report is available here (S&P Global Credit Portal subscriber link). 

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High yield bond issuance, sentiment, pick up in February as oil rebounds

High-yield bond issuance came to life last month as the secondary market rallied from the 2016 double-bottom low amid a rebound in oil and iron ore pricing, and a return of retail cash inflows to the asset class.

The $9.36 billion of output in the month was not historically large—average monthly volume over the past year was $21.8 billion—but it expanded upon $5.94 billion in January and $3.83 billion in December, which represented the lowest monthly volumes since early 2009 amid the credit crisis.

In contrast to January, which saw 88% of its issuance come from the shadow calendar backlog of M&A deals, a mild reopening of the market brought forth opportunistic issuers alongside M&A deals in February for roughly half-and-half supply, at 46% and 54%, respectively. Indeed, there were several drive-by bond-refinancing efforts, most notably $1.7 billion from benchmark issuer Charter Communications, as well as loan-refinancing deals, such as Realogy Group with $250 million and $400 million from woundcare-products maker Acelity/Kinetic Concepts.

The expanding issuance, especially with regard to quickly arranged opportunists, came on the back of the market rebound. The S&P U.S. Issued High Yield Corporate Bond Index (ticker: SPUSCHY) turned out just a 0.5% return for the month, but that’s after bottoming out at mid-month before rallying 3.70% in the final two weeks. The yield to worst on the index fell to 8.67%, after peaking at 9.62% mid-month and closing January at 8.85%.

issuance vs YTW

Indeed, it was an enduring two-week rebound from the February trough that strategists called the second half of a double bottom after the January swoon. To this end, the SPUSCHY index bottomed out with a negative 3.9% year-to-date return on Jan. 20 after the New Year sell-off, rallied back to just negative 1.56% on Jan. 29, turned down to negative 4.84% on Feb. 11, and then recovered to negative 1.03% by the close of the month.

But not all investors are convinced.

“The markets have been a little more receptive to the risk environment recently, but I’m not sure we are out of the woods yet,” outlined Clayton Albright III, Head of Investment Strategy at Wilmington Trust.

Away from the oil market issues, Albright flags the broader markets. “The big question that we have is whether the U.S. economy is on a path to recession. We are keeping a strong eye on that.”

The LCD flow-name bond sample followed a similar track. The average bid price edged up 22 bps in the final February observation, to 91.64% of par, offering an average yield to worst of 8.79%, from a 2016 low of 87.63 on Feb. 11, yielding 9.75%. That was deeper than the Jan. 21 prior low of 88.77, yielding 9.45%.

hy flow names vs spuschy

With such limited supply, typical monthly observations on sector issuance and use of proceeds will not be explored. More notable in the month is the year’s first postponed deal, the €1.55B cross-border LeasePlan buyout financing, as well as the year’s first bond-to-loan funding shift, a $300 million swing in theSolera/Audatax buyout financing. Last year, there were 11 such shifts, with $875 million moving that way, according to LCD.

Looking ahead, the challenging market conditions of late have slowed the M&A machine and, thus, expansion of the shadow calendar. Nonetheless, ON Semiconductor last month was added to the list, with a $400 million offering of senior notes to support the loan financing of the company’s acquisition of rival Fairchild Semiconductor. The backlog is now roughly $26 billion.

hy stats

The U.S. trailing 12-month speculative-grade corporate default rate isestimated to have increased to 3.3% in February, from 2.82% in January, according to S&P Global Fixed Income Research (S&P GFIR). The current observation estimate represents the highest level in just over six years, or since the rate was at 3.43% in December 2010.

There were 11 corporate defaults during the month. Specialty metals company A.M. Castle and industrial manufacturer Constellation Enterprises extended maturities on secured notes; Sheridan Investment Partners paid down two loan facilities below par; Comstock Resources completed a bond-for-equity exchange; PetroQuest Energy completed a bond-uptier exchange; Noranda AluminumSFX Entertainment, and Paragon Offshore each filed for bankruptcy; and Energy XXI and Venoco via issuer entity Denver Parent skipped interest payments.

The U.S. corporate bond distress ratio stood at 33.9% in February, a level last surpassed in July 2009 during the recession, when the ratio fluctuated from 14.6% to a staggering 70%, according to S&P GFIR. The latest observation is up from 24.5% at the end of 2015, and is more than double the 13.2% reading in July 2015.

Looking ahead, the S&P GFIR forecast for the U.S. speculative-grade default rate is for an increase to 3.9% by the end of 2016. — Matt Fuller

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

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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CDS: Default Protection Costs Ease as High Yield Sentiment Improves

One sign that sentiment in the beleaguered high yield bond market is improving: The cost of credit default protection has dropped across the board over the past week. (The one exception: Valeant Pharmaceuticals, which faces a host of unique issues.)

Other signs of late signaling a less-bearish market: Prices on U.S. high yield issues in the secondary this week saw their biggest gain since December 2014, and investors last week poured a whopping $2.7 billion into U.S. high yield funds, a marked turnaround from sizable outflows – and occasional tepid inflows – over the past few months.
CDS change

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Bond prices surge with largest gain since December 2014

The average bid of LCD’s flow-name high-yield bonds gained 213 bps in today’s observation, to 93.77% of par, offering an average yield to worst of 8.24%, from 91.64 on Thursday, yielding 8.79%. The performance within the 15-bond sample was broadly positive, with 14 gainers against one decliner.

This is the fifth consecutive positive reading, a streak that hasn’t occurred since February 2015, and it’s the single largest one-observation gain since a gain of 236 bps on Dec. 18, 2014, surpassing this year’s recent rally of 208 bps on Jan. 26. (That’s, of course, not including gains tied to interval and credit-news revisions to the 15-bond sample.)

Gains are noted against the backdrop of an enduring two-week rebound from the February trough that strategists are calling the second half of a double bottom after the January swoon. To that end, with the steady advance in the second half of February, the average is up 460 bps dating back two weeks but only higher by 245 bps dating back four weeks. Moreover, it’s now up 614 bps from the recent low of 87.63 recorded on Feb. 11, 2016, which was just below the prior low of 88.77 recorded on Jan. 21, 2016.

Strong gains of late are linked to a return of inflows to the asset class, and some rising commodities prices, including oil and iron ore. As well, there’s an ongoing technical strength stemming from still-low U.S. Treasury rates and limited supply out of the primary high-yield market.

As well, earnings season has been fairly kind to many credits, including Scientific Games. To that end, much of today’s advance can be tied to the SGMS 10% notes in the sample, which are up 10.25 points, to 78.75 since reporting results last week. A pro forma reading without such a surge would still have the average up roughly a commendable 150 bps, but that’s less than some other gains since the February low, such as 1.53 bps increase out of the Feb. 11 low.

With the recent broad-based appreciation in price, the year-to-date decline in the average price has turned back into the black, at positive 148 bps. For comparison, the average price was down 466 bps at the 2016 low of 87.63 on Feb. 11 and negative 1,050 bps for all of 2015. With today’s increase in the average price, the average yield to worst plunged 55 bps, to 8.24%, and the average option-adjusted spread to worst was collapsed by 71 bps, to T+669, for the first sub-700 reading in seven weeks. The larger move in spread as compared to yield can be linked to U.S. Treasury weakness of late, as rising underlying yields encourage spread compression.

After removing deeply distressed credits with huge yield and spread amid the year-end revision, the LCD flow names have been more closely aligned with broader market averages. For example, the S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed Monday, Feb. 29, with a 8.67% yield to worst and an option-adjusted spread to worst of T+775.

Bonds vs. loans
The average bid of LCD’s flow-name loans advanced 82 bps in today’s reading, to 96.49% of par, for a discounted loan yield of 4.34%. The gap between the bond yield and the discounted loan yield to maturity stands at 390 bps. —Staff reports

The data:

  • Bids increase: The average bid of the 15 flow names rallied 213 bps, to 93.77%.
  • Yields decrease: The average yield to worst plunged 55 bps, to 8.24%.
  • Spreads decrease: The average spread to U.S. Treasuries imploded by 71 bps, to T+669.
  • Gainers: The largest of the 14 gainers was by a huge margin. Scientific Games 10% notes due 2022 rallied 10.25 points, to 78.75, since the company reported year–end results last week.
  • Decliners: The lone decliner was Valeant Pharmaceuticals 5.875% notes due 2023, which fell four points, to 81.
  • Unchanged: None.
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Solera Prices $1.73B Bond Offering to Yield 11.47%

Solera Holdings today completed its buyout bond deal via a Goldman Sachs–led bookrunner group. Terms on the B–/Caa1 senior notes were finalized at the tight end of revised guidance, offering 11.47%, but roughly 50 bps higher than the initial price talk amid the challenging market conditions, according to sources. As well, covenant revisions to the 144A-for-life deal included changes to EBITDA add-backs, a reduction in basket sizes, and tightening leverage thresholds for restricted payments. There was also a raft of revisions to the cross-border bond-and-loan package, including a larger loan offering, the eventual elimination of a proposed euro-denominated tranche after a short-lived effort to privately pace it with the funds shifting back into the dollar series, a boost in pricing across all the debt tranches, and other alterations to the loan term sheets. Proceeds from the deal will be used, along with those from the approximate $2.2 billion of loan efforts and a $3 billion-plus equity check, to finance Vista Equity Partners’ $6.5 billion purchase of the insurance claims-processing technology company, which also operates under the name Audatex North America. Terms:

Issuer Solera Holdings
Ratings B–/Caa1
Amount $1.73 billion
Issue senior notes (144A-life)
Coupon 10.5%
Price 95
Yield 11.47%
Spread T+983
Maturity March 1, 2024
Call nc3 @ par+75% coupon
Trade Feb. 29, 2016
Settle March 3, 2016 (T+3)
Bookrunners GS/CITI/JEFF/MACQ/NOM/UBS
Price talk 10.5% @ 94–95 (revised from 10.75–11%)
Notes First call par+75% coupon; downsized by roughly $300 million, with euro tranche placed privately, but then upsized as euros eliminated; several covenants reworked.

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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European High Yield Bond Funds Break Losing run with €305M inflow

J.P. Morgan’s weekly analysis of European high-yield funds shows a €305 million inflow for the week ended Feb. 24. The reading includes a €55 million inflow for ETFs, and a €35 million inflow for short duration funds. The reading for the week ended Feb. 17 is revised from a €441 million outflow to a €453 million outflow. Note, the net weekly reading also includes flows for managed accounts.

The provisional reading for January is a €1.31 billion outflow, which appears to be the second-largest monthly outflow number recorded (the largest being a €2.2 billion outflow in June 2013). Inflows for 2015 through December are €9.66 billion, versus full-year inflows of €4.15 billion and €8.94 billion in 2014 and 2013, respectively.

The weekly inflow is the first of any significance this year (though a €5 million inflow was recorded in the first week of the year), and brings to an end a run of six consecutive weekly outflows. It also represents welcome good news for a market that is struggling amid widespread volatility – it has been the worst start to a year for primary activity since 2009, and news thatSolera is now dropping its public euro bond offering and placing the paper privately means the public market has now failed to price its last two deals. Still, should this latest weekly reading be the first of a run of inflows, bankers will hope that outflow fears will abate and fund managers will start putting money to work, which should reduce new-issue premiums and make it easier to print new paper.

Meanwhile, U.S. high-yield funds recorded a net inflow of $2.7 billion in the week ended Feb. 24, marking the largest infusion of fresh cash in 18 weeks. Moreover, this follows an inflow of $65.5 million the week before, the first positive reading in three weeks at the time. ETFs laid solid influence, at 46% of the latest inflow. The year-to-date outflow total is now cut back to just $2.4 billion, with 14% related to the ETF segment. For comparison, the same period in 2015 saw inflows of $10.8 billion, with ETFs accounting for 42%.

J.P. Morgan only calculates flows for funds that publish daily or weekly updates of their net asset value and total fund assets. As a result, its weekly analysis looks at around 60 funds, with total assets under management of €50 billion. Its monthly analysis takes in a larger universe of 90 funds, with €70 billion of assets under management. For a full analysis, please see “Europe receives HY fund flow calculation.” — Luke Millar

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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