Bankruptcies, Defaults Continue At Lower Level

Recent bankruptcy filings, payment defaults and bankruptcy exits across a range of industries indicate that some portfolio companies continue to struggle despite the end of the recession.

Although the environment is sharply improved from last year, the distress is likely to persist, one buyout pro said, as a slow economic recovery and heavy debt levels continue to weigh on portfolio companies. Buyouts has tracked 23 LBO-backed companies that filed for bankruptcy in 2010 through mid-October, compared with 83 in all of 2009.

Workflow Management Inc., a holding of Washington, D.C., buyout firm Perseus LLC, filed a prepackaged Chapter 11 on Sept. 29. The Dayton, Ohio, company, a provider of outsourced print and promotional marketing services, said its proposed plan of reorganization provides for full payment to all creditors.

Perseus, which focuses on growth equity and distressed investing, acquired a predecessor company, the Relizon Co., in April 2004, according to the Thomson One database, a product of Thomson Reuters, the publisher of Buyouts. According to its Web site, the company, which does business as WorkflowOne, is the result of a combination of Relizon and Workflow Solutions LLC in November 2005. Both companies are venerable printers: Relizon started as part of Reynolds and Reynolds in 1866; Workflow began in 1912 as Newport News Printing.

WF Capital Holdings Inc., the parent company of Workflow Management, was also included in the filing, along with a number of sister companies. The bankruptcy filing listed assets and debt of as much as $500 million, according to Bloomberg.

Moody’s Investors Service cut Workflow Management’s “probability of default rating” to D after the filing, reflecting the default, and cut its “corporate family rating” to Ca from Caa3, indicating some prospect of recovery of principal and interest. Moody’s withdrew its ratings on $325 million of rated debt, and said the company reported 2009 revenue of $662 million. Neither Perseus nor Workflow Management responded to requests for comment.

Also in distress is Graceway Pharmaceuticals LLC, a holding of Chicago buyout shop GTCR Golder Rauner LLC. Moody’s reported that Graceway, of Bristol, Tenn., defaulted in August on a $330 million second lien loan, triggering a cross default. It cut its “corporate family rating” to Ca, and said the rating outlook remains negative.

Standard & Poor’s Ratings Services blamed the default on the loss in February of Graceway’s “pediatric exclusivity” on a patent for Aldara, a cream used to treat skin cancer and related conditions, opening the product to generic competition and cutting Aldara sales sharply. S&P cut its corporate credit rating on Graceway to ‘SD’ from ‘B-’, reflecting the default, and cut its senior secured bank credit facility to ‘CC’ from ‘B-’, terming it “highly vulnerable.”

GTCR Golder Rauner, which includes health care as one of its major focus areas, launched Graceway in 2006 in partnership with industry veteran Jefferson J. Gregory as a platform for the development and licensing of skin and respiratory treatments, according to Thomson One. Neither Graceway nor GTCR responded to requests for comment.

On the bright side, Extended Stay America Inc. emerged from bankruptcy this month, in a $3.925 billion deal with an investment group including The Blackstone Group, Paulson & Co. and Centerbridge Partners, Reuters reported. Extended Stay, a chain of about 680 hotels, filed its Chapter 11 petition in June 2009, with more than $7 billion in debt after its 2007 buyout by Lightstone Holdings.

Angus C. Littlejohn Jr., the chairman and CEO of Littlejohn & Co. in Greenwich, Conn., predicted that portfolio companies would continue to face difficulties, as the buyout industry tries to right itself from the asset boom earlier this decade and the financial crisis that followed. “A lot of people thought the private equity portfolio was insulated from the general economy, which it wasn’t,” Littlejohn said. “People lost money in ways they had not anticipated.”

Portfolio companies are likely to continue to suffer distress, not only because of the slow economy but also because the long slump added to the difficulty of their heavily leveraged capital structures, he said. But the economy is at least leveling out, and with a double dip unlikely, in his view, investing opportunities will improve, Littlejohn said.