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S&P: 37 Corporate Defaults in 2016’s First Quarter. That’s the most since 2009

corporate defaults

Fueled by a struggling energy industry, there were 37 corporate defaults world-wide in 2016’s first quarter, the most since the third quarter 0f 2009, in the wake of the Lehman-inspired financial crisis.

The first-quarter number is down from the 30 defaults during the previous three months and from the 22 defaults in the first quarter of 2015, according to S&P Global Fixed Income Research. Of the 37 1Q defaults, 17 were from the energy/natural gas sectors; 29 were from issuers domiciled in the U.S.

The full Global Corporate Quarterly Default Update is available to S&P Global Fixed Income Research subscribers here. It was written by Diane Vazza, Nick Kraemer, and Zev Gurwitz

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Bankruptcy – Caesars: Talks with First-Lien Noteholders on Restructuring Agreement are ‘Ongoing’

Caesars Entertainment Operating Corp. (CEOC) and its parent, Caesars Entertainment Co. (CEC), remain in ongoing negotiations with the ad hoc committee of first-lien noteholders in CEOC’s Chapter 11 case concerning a new restructuring support agreement, the company said in an amended disclosure statement filed on June 28.

Caesars Entertainment logoAs reported, the company has recently entered into new or amended restructuring support pacts with several key creditors constituencies, including first-lien bank lenders, the unsecured creditors’ committee, and holders of subsidiary guarantee notes, in connection with its efforts to confirm a reorganization plan.

As also reported, according to gaming news site CalvinAyre.com an attorney for a group of first-lien noteholders said at a court hearing last week that a deal with the company was close.

The Chicago bankruptcy court on June 22 approved the adequacy of the company’s disclosure statement, clearing the way for creditors to vote on the company’s proposed reorganization plan. The voting deadline is Oct. 31, and a plan confirmation hearing is set for Jan. 17, 2017.

As reported, the company’s reorganization strategy is to position itself to cram down its reorganization plan on second-lien lenders, which so far have rejected the company’s reorganization and settlement proposals as inadequate, in the hopes of either using the cram-down threat to force second-lien lenders to reach a deal more favorable to the company or, alternatively, to simply confirm a reorganization plan.

The first-lien noteholders’ support is essential to the company’s reorganization strategy, however, because of the significant risk that the company would be unable to cram down a plan on them, given that their claims are secured and part of their recovery is comprised of equity in the reorganized company.

The ad hoc noteholder group controls roughly 54% of the company’s first-lien notes, a more than ample blocking position.

The company and the first-lien noteholder group had previously entered into an RSA, but that deal was terminated after the company failed to meet certain milestone deadlines.

According to the company’s updated disclosure statement filed on June 28, the deal currently being negotiated with the ad hoc noteholder group could provide for certain modifications to the company’s proposed reorganization plan including, among other things, “some amount of additional CEC bond consideration … to holders of secured first-lien notes claims in the event that the holders of second-lien notes claims in Class F vote as a class to reject the plan,” as well as additional payment to the ad hoc group’s financial advisor.

The deal could also provide that the non-termination of the eventual RSA reached with noteholders be a condition precedent to the company’s emergence from Chapter 11, the disclosure statement said. — Alan Zimmerman

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S&P: Financials Top List of 2016 Fallen Angels (and ‘Potential’ Fallen Angels)

global fallen angels financials

Financial institutions – which were battered especially hard after Great Britain’s Brexit vote on Thursday – might find a relatively rough road ahead for the rest of 2016, in terms of credit downgrades.

According to S&P, a full 25% of ‘potential fallen angels’ globally – 17 of 68 – hail from the financial sector. Of that number, 10 are from the U.S.

‘Potential fallen angels’ are issuers rated BBB- with either negative outlooks or ratings on CreditWatch with negative implications.

“Negative outlooks and CreditWatch negative placements are good leading indicators of downgrades because they are strong predictors of rating actions in the aggregate and when broken out by rating category, region, or sector,” according to S&P. “Hence, the financial institutions sector may play a strong role in future downgrades.” – Tim Cross

The full Fallen Angel analysis is available to S&P Global Fixed Income Research subscribers here. It was written by Diane Vazza, Sudeep Kesh, and Gregg Moskowitz

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US High Yield Bond Market Adjusting To Brexit, With Large Gaps Lower

Almost every asset class globally is volatile this morning after the United Kingdom voted in favor of exiting the European Union, and the U.S. high yield market is adjusting accordingly with significant prices declines. Trading volume is restrained thus far, but market participants are keeping an eye on cashflow—there are already several bid-wanted lists making the rounds—and eyes of course are on big losses in equities overseas, oil pricing, and the U.S. Treasury rally, which has sent yield to roughly four-year lows.

In the cash market, prices of widely held names have dropped. Examples include Frontier Communications 11% notes due 2025 trading two points lower, at 102; the Sprint 7.875% notes due 2023 changing hands in blocks at 80, versus 82.5 yesterday; Post Holdings7.375% notes due 2022 pegged two points lower, at 104.5/105.5; andUnited Rentals 5.75% notes due 2024 down the same amount, at 99/100, according to sources and trade data.

Commodities have fallen more. Chesapeake Energy 8% second-lien notes due 2022 were in a bit of price discovery in the mid-80s, from quotes of 87.5/88.5 going out last night, while Freeport McMoRan4% notes due 2021 traded down fully five points, at 87, data show.

As for recent new issues, Dell 7.125% notes due 2024 traded off two points, at 102, while Weatherford International 7.75% notes due 2021 were lower by three points in a wider market quote of 95/97, according to sources.

In the synthetics market, the unfunded HY CDX 26 index dropped 1.688 points, or approximately 1.6%, to a 101.625 context. This is the largest one-day decline dating to a 1.9% plunge on Dec. 11, 2015, and it marks a five-week low.

Over in CDS, it was also red across the board this morning. Some notables include five-year protection on J.C. Penney, which was 32% wider, at 6.4/7.9 points upfront; Teck Resources, which was out 29%, at 9.625/11.625 points upfront; and AK Steel, which pushed out roughly 18%, to 18.4/20.4 points upfront, according to Markit. All quotes are with 500 bps running. — Matt Fuller

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US High Yield Funds See 2nd Straight Cash Withdrawal ($766M This Time)

U.S. high-yield funds recorded an outflow of $766 million in the week ended June 22, according to the weekly reporters to Lipper only. This is the second-consecutive outflow, after $1.8 billion last week, for a total of roughly $2.6 billion over that span.

US high yield fund flowsThe influence of ETFs was significantly diminished this past week, at just 20% of the sum, versus 87% of the outflow last week.

Whatever that might say about fast money, hedging strategies, and other market-timing efforts, this week’s fresh net outflow drags the trailing four-week average deeper into the red, at negative $419 million, from negative $368 million last week and from positive $366 million two weeks ago.

The year-to-date total infusion contracts a bit to $4.9 billion, with only 6% ETF-related. Last year at this point, after 25 weeks, the $4.2 billion net inflow was 22% ETF-related.

The change due to market conditions this past week was positive $1.2 billion, or roughly 0.6% against total assets of $190.7 billion at the end of the observation period. The ETFs account for about 20% of the total, at $37.4 billion. — Matt Fuller

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Bankruptcy: Energy XXI Dislcosure Statement Hearing Delayed as Opposition Grows

The bankruptcy court overseeing the Chapter 11 proceedings of Energy XXI has delayed the hearing on the adequacy of the company’s proposed disclosure statement by one week, to June 30, at which time the bankruptcy court will consider further delays in the case in order to give the company and its creditors an opportunity to renegotiate a reorganization plan.

The disclosure statement hearing had been scheduled for June 23.

energy xxi logoThe one-week delay follows an order from the bankruptcy court on June 15 requiring the appointment of an equity security holders committee in the case and, in the wake of that decision, an emergency motion from the unsecured creditors’ committee in the case filed on June 17 seeking a three-week delay in the disclosure statement hearing on the grounds that “these cases must now either change direction or become mired in expensive, time consuming litigation.”

A hearing on the committee’s motion is scheduled for June 30, as well, according to the case docket.

In its motion, the creditor panel noted that at the June 15 hearing on the appointment of an equity committee, the bankruptcy court “expressed serious concerns regarding, among other things, allegations of misrepresentations by the debtors’ management, the personal loans provided to the debtors’ CEO, and proposed distributions under the plan to management pursuant to a management incentive plan contemplated by the plan.”

The committee asked the Houston, Texas, bankruptcy court to delay the disclosure statement hearing, saying that the case “should be placed, at least for a short time period, on a track of negotiation … to nudge the debtors and the second lien noteholders to engage with the committee on serious negotiations for a consensual plan.”

The committee said that the company’s current proposed plan cannot be crammed down, and that the changes sought by the panel “would be too fundamental” to provide for a modification of the disclosure statement and a re-solicitation of votes if the court were to approve the disclosure statement now, prior to the negotiations and potential sought-after changes.

As reported, under the company’s proposed reorganization plan filed on May 20, the company’s second-lien lenders are to receive 100% of the equity in the reorganized company.

According to a valuation analysis filed June 4, the company estimated its reorganized total enterprise value to be roughly $500–800 million, with a mid-point of $675 million. Further, based on forecasted pro forma debt of $75 million post emergence, the company said the estimated TEV implied an equity value range for the reorganized company of $475–725 million, with a mid-point of $600 million.

As also reported, under the proposed plan, holders of the company’s unsecured and convertible notes would receive a package of out-of-the-money warrants equal to an aggregate of up to 10% of the new equity (subject to dilution from the management incentive plan) with a maturity of 10 years, and an equity strike price equal to the principal amount of the second-lien notes claims less the original issue discount of approximately $53.5 million, plus accrued and unpaid interest.

The committee said that if the bankruptcy court delays the disclosure statement hearing, the committee would use the time to negotiate a reorganization plan that eliminated the current plan’s “death trap” structure, “appropriately” allocated the value of unencumbered assets among creditors, and tailored liability releases to “avoid prejudice to creditors and interest holders.”

Meanwhile, an ad hoc committee of unsecured noteholders of the company’s unit Energy XXI Gulf Coast (EGC) also said in court filings that the company has “significantly understated the value … available for distribution to unsecured creditors of EGC,” and argued that the company’s proposed plan was “fatally flawed because it misallocates value that is available for distribution to unsecured creditors and, instead, proposes to gift such value to secured creditors.” (Although it is worth noting that at the same time the noteholder panel argued that the company understated its value, it also argued that there was not sufficient residual value to provide a recovery for equity holders.)

In any event, the ad hoc noteholder group agreed in a June 17 court filing that the disclosure statement hearing should be delayed, arguing that the company’s proposed plan and disclosure statement was “fundamentally flawed in at least three ways.”

First, the ad hoc group argued, the company’s valuation disclosures failed to explain why the company’s estimated valuation of $675 million on the confirmation date “differs so dramatically from the debtors’ own statements showing $4.1 billion of enterprise value in December 2015, only four months before the [Chapter 11] filing.”

Second, the group said, the company failed to provide adequate information with respect to “several unencumbered sources of value for EGC unsecured noteholders, foremost of which is a $325 million intercompany secured loan from ECG” to EPL, a separate unit of the company. As the noteholders see that transaction, ECG’s secured claim on the intracompany note is senior to any claims EPL’s unsecured creditors may have against the unit, adding that insofar as EGC creditors are concerned, it is “indisputable” that the proceeds of the note are “unencumbered [and] available for recovery by EGC unsecured noteholders free of any liens asserted by EGC’s secured creditors.”

And finally, the noteholders state, the disclosure statement and reorganization plan fail to reflect additional sources of unencumbered assets that can be used to satisfy unsecured creditor claims, including about $22.3 million of unencumbered cash, real property not subject to mortgages, potential claims of action and other personal property.

With respect to the appointment of an equity panel, on June 2, an ad hoc committee of equity holders sought appointment of an official committee, arguing that on March 31, the company “essentially created the perception of massive insolvency by downgrading” its “proved undeveloped [energy] reserves” to “probable reserves,” thus creating a $2.67 billion writedown.

The ad hoc panel further noted that this writedown occurred despite the fact that oil prices bottomed out in January at around $26.88 per barrel, and are currently trading at more than $48 per barrel.

“The creation of this perception of massive insolvency was apparently done in an attempt to justify management’s decision to eliminate all of the existing equity and give the vast majority of it to the second lien note holders, who will then hire existing management to run the company without any disclosure of compensation other than the mention of an incentive plan where management can retain up to 10% of the equity in the reorganized debtors,” the ad hoc committee said.

The court order did not state a reason for the appointment of an equity committee, but typically, the existence of such a committee in a Chapter 11 proceeding rests on the twin findings that there would be residual value available in the case for equity holders, and the equity holders’ interests are not adequately represented by the unsecured creditors’ committee.

As of today, the U.S. Trustee for the bankruptcy court had not yet appointed an official equity committee. The ad hoc equity committee comprised 16 individual shareholders.

Last, but not least, the ad hoc equity committee had also raised questions in its motion regarding $16.4 million in so-called bonus payments and expense reimbursements over the past year to the company’s management, including $4.6 million to CEO John Schiller.

Note that the unsecured creditors’ committee said in its motion that even as it sought to renegotiate the terms of a plan with the company, it would continue to investigate the company’s pre-petition transactions with management as potential claims that could belong to the company. — Alan Zimmerman

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AmeriGas Wraps $1.35B High Yield Bond Offering Backing Tender Offer

amerigas logoPropane-gas distributor AmeriGas placed a two-part offering late Monday at the middle of talk. The SEC-registered bonds were shopped via joint bookrunners Bank of America Merrill Lynch (lead), Citi, J.P. Morgan, and Wells Fargo Securities, and included six additional co-managers. Proceeds will be used to finance tenders offers for the company’s 6.25% notes due 2019, 6.75% notes due 2020, and 6.5% notes due 2021, and for general corporate purposes. Terms:

Issuer AmeriGas Partners
Ratings Ba3/BB
Amount $675 million
Issue senior notes (SEC reg.)
Coupon 5.875%
Price 100
Yield 5.875%
Spread T+420
Maturity Aug. 20, 2026
Call non-callable for life
Trade June 20, 2016
Settle June 27, 2016 (T+5)
Physical bookrunners
Joint bookrunners BAML/CITI/JPM/Wells Fargo
Co-managers Citizens/PNC/BB&T/BNY/Santander/TD Securities
Price talk 5.75–6%
Notes
Issuer AmeriGas Partners
Ratings Ba3/BB
Amount $675 million
Issue senior notes (SEC reg.)
Coupon 5.625%
Price 100
Yield 5.625%
Spread T+409
Maturity May 20, 2024
Call non-callable for life
Trade June 20, 2016
Settle June 27, 2016
Physical bookrunners
Joint bookrunners BAML/CITI/JPM/Wells Fargo
Co-managers Citizens/PNC/BB&T/BNY/Santander/TD Securities
Price talk 5.5–5.75%
Notes

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US Leveraged Loan, High Yield Bond Issuance Eases as Markets Eye Brexit, Fed

Leveraged finance issuance cooled considerably last week ahead of the Brexit vote in the U.K. and a Fed announcement in the U.S., and on the heels of a surge of activity in both the high yield bond and leveraged loan markets the previous week.

US leveraged loan high yield bond issuance

Issuance in the two segments totaled $15.1 billion last week, $9.9 billion in loans and $5.2 billion in bonds. That’s down significantly from the $30 billion the previous week ($17.9 billion/$12 billion), according to LCD, an offering of S&P Global Market Intelligence.

Year to date, U.S. leveraged loan issuance totals $203 billion, down from $218 billion at this point in 2015. There has been $117 billion in high yield issuance, down 34% from the $179 billion at this point last year.

Of note in the leveraged loan market, power concern Dynegy brought to market a $2 billion credit to refinance debt backing an ENGIE M&A deal, while business payment processing co. Wex approached the market for a $1.21 billion institutional loan backing the acquisition of Electronic Funds Source (there was a sizable revolving credit, too).

The highest-profile deal in the bond market last week: a $2.9 billion offering from Reynolds Group. That debt helps fund a cash tender offer. – Tim Cross

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Revlon Eyes $3B of Debt for Elizabeth Arden Acquisition

Revlon disclosed that it has entered into a commitment letter with Citigroup and Bank of America Merrill Lynch providing a $1.8 billion senior secured term loan, a $400 million asset-based revolver, and up to $400 million of a senior unsecured bridge loan in connection with the planned $870 million acquisition of Elizabeth Arden. Additionally, Revlon is seeking to privately place $400 million of senior unsecured notes.

Elizabeth-Arden-LogoThe debt financing will be used to fund the acquisition as well as refinance Revlon’s and Elizabeth Arden’s debt. As of March 31, 2016, Revlon had $647.7 million outstanding under its B term loan due 2017 (L+250, 0.75% LIBOR floor) and $649.5 million outstanding under its B term loan due 2019 (L+300, 1% floor).

In the secondary, Revlon’s loans have been up around par. Holders of Revlon 5.75% notes due 2021 have held on to the debt, trade data show. The paper last changed hands at par on June 10, and trading on the notes was light leading up to the announcement. Elizabeth Arden’s 7.375% notes due 2021 saw greater gains. The paper, also not an active mover in the secondary market, changed hands at 102.25 on Friday morning, down slightly from the 102.75 price on Thursday afternoon. Prior to this, however, the notes last sold on May 26 at 72 and a quarter, trade data show.

Revlon’s existing 5.75% notes, which totaled $492.7 million as of March 31, though, will remain outstanding.

Elizabeth Arden, meanwhile, as of March 31, had $42.5 million in borrowings and $3.4 million in letters of credit outstanding under its $300 million revolver due December 2019, $25 million in outstanding borrowings under its second-lien revolver, and $350 million outstanding under its 7.375% senior notes due March 2021.

Revlon expects pro forma leverage will be roughly 4.2x net by the end of 2016.

Revlon and Elizabeth Arden yesterday announced that they have signed an agreement under which Revlon will acquire the outstanding shares of Elizabeth Arden for $14 per share. The acquisition is expected to close by the end of 2016.

New York–based Revlon sells beauty and personal care products. The company’s shares trade on the NYSE under the ticker REV. Elizabeth Arden, which is based in Miramar, Fla., also sells beauty products. Elizabeth Arden’s shares trade on the Nasdaq under the ticker RDEN. Elizabeth Arden is rated CCC+/Caa1. — Richard Kellerhals/Jakema Lewis

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Bankruptcy: Energy Future Holdings’ TCEH Nets Disclosure Statement OK

The bankruptcy court overseeing the Chapter 11 proceedings of Energy Future Holdings today approved the adequacy of unit Texas Competitive Electric Holding’s proposed disclosure statement, according to a court order filed in the case.

The hearing on the disclosure statement was held yesterday in Wilmington, Del.

The approval clears the company to solicit creditor votes for the proposed reorganization plan for the unit.

The voting deadline is Aug. 3, and the hearing to confirm the proposed reorganization plan is scheduled for Aug. 17.

As reported, after the company’s proposed sale of its regulated utility, Oncor, fell through in late April as a result of unfavorable regulatory and tax rulings from the Texas Public Utility Commission, the company filed new and amended reorganization plans for its so-called E-side (comprised of parent EFH and intermediate holding company Energy Future Intermediate Holdings, which directly holds the company’s Oncor stake) and T-side (the company’s unregulated power generation and retail operations, or TCEH) units.

As also reported, the new reorganization plan for TCEH continued to provide for substantially the same creditor recoveries and for the spin-off of TCEH, although the “sequencing” of the company’s reorganization, which previously had contemplated the TCEH spin-off and the Oncor sale occurring simultaneously, was changed to provide for the TCEH spin-off and reorganization separately from, and prior to, the completion of the reorganization on the E-side of the company.

A hearing on approving the disclosure statement for the company’s E-side is slated to begin July 21, with a reorganization plan confirmation hearing to begin Sept. 26. — Alan Zimmerman

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