Debt Of At-Risk Portfolio Companies Drops

The overall count in S&P’s latest “weakest links” report rose slightly over the last three months, although the amount of debt they owe fell sharply.

The Nov. 4 “weakest links” list includes 124 entities with combined debt of $185.9 billion around the world. From this, Buyouts identified at least 24 companies with LBO sponsors, accounting for $45.726 billion of the debt. S&P had 120 weakest links companies with $391.96 billion in debt in its August report. At that time, we counted 23 portfolio companies that represented $134.84 billion of the total debt.

The latest report, Global Weakest Links And Default Rates: Weakest Links Continue To Edge Higher As Eurozone Anxiety Persists, included two more companies with U.S. financial sponsors, while one dropped out. Entities on the “weakest links” list have a speculative corporate credit rating of ‘B-’ or lower, plus a negative outlook, have a CreditWatch with a negative implication, or both.

One of the biggest developments over the last three months was the drastic reduction in the affected debt of all the entities on the listing, as well as the level for those with LBO sponsors. In fact, all the portfolio companies that remained on the list since August list showed some reduction in debt.

The overall reduction stems largely from Energy Future Holdings Corp., which is sponsored by Kohlberg Kravis Roberts & Co., TPG and GS Capital Partners. The utility’s debt was reduced back to $33.37 billion, the same level back in May, from $101.45 billion when we last wrote about S&P “weakest links” report in August.

Ares Management LLC’s Orchard Supply Hardware LLC and Fenway Partners Inc.’s Coach America Holdings Inc. are also LBO-backed businesses that witnessed their debt decrease in recent months. Orchard Supply had affected debt of $174 million, as of Oct. 21, compared with the retailer’s debt of roughly $4.29 billion on Aug. 17. Coach America’s debt dropped to $300 million from $760 million. S&P lowered the corporate credit rating on Orchard Supply Hardware to ‘B-‘ from ‘B’ on June 24, 2011, because the retailer reported operating results for the fiscal quarter ended April 30, 2011, that were below the rating agency’s expectations. Ares Management LLC added the San Jose, California-based hardware retailer to its portfolio in November 2005.

Bruckmann Rosser Sherrill & Co.’s Sheridan Group Inc. saw its affected debt drop to nil from the $150 million level when the provider of commercial printing services was first included in S&P’s “weakest links” report in mid-September.

From the 24 portfolio companies in the latest report, two industries together accounted for 11 of the spots. Media and entertainment had half a dozen representatives, while Retail/Restaurants had five. Other categories, including consumer products, capital goods and transportation had one or two on the list. Media and Entertainment accounted for three of the latest additions Buyouts identified on the list.

At various points in September, S&P lowered the rating on three players in the media and entertainment field to warrant inclusion on the “weakest links” list. In addition to the downgrade on Hunt Valley, Md.-based Sheridan Group to ‘CCC+’ from ‘B-’ on Sept. 14, the ratings agency cut its corporate credit rating on One Equity Partners LLC’s Vertrue Inc. to ‘CCC+’ from ‘B-,’ citing poor operating performance and weakening liquidity at the Norfolk, Conn.-based provider of online marketing services.

In addition, S&P downgraded ABRY Partners LLC’s ProQuest LLC to ‘B-‘ from ‘B’ because of the Ann Arbor-Mich.-based library content provider’s weak operating performance. On Sept. 28, S&P said its rating reflects its view that operating performance will likely remain weak over the intermediate term.

No one sponsor had more than a couple of investments in the November “weakest links” list. GS Capital Partners, Kohlberg & Co., KKR, Bruckmann Rosser Sherrill & Co. and One Equity each had two portfolio companies on the latest listing. The latter two firms each had one recent addition since we last reviewed the S&P report.

Defaults And Bankruptcies

Meantime, S&P has seen about 35 issuers default so far this year, including four entities that are confidentially rated. From this group, Buyouts counted at least 11 with U.S.-based buyout shop sponsors. These are companies that received either a ‘D’ or ‘SD” rating from the ratings agency this year.

The 35 issuers represent debt of $54.9 billion and the 11 portfolio companies accounted for $37.4 billion of this aggregate. A major piece of this pie is still held by Energy Future Holdings Corp.’s Texas Competitive Electric Holdings Co. LLC subsidiary.

Since the start of October, at least four portfolio companies have joined the ranks of defaulters. Sun Capital Partners Inc.’s Real Mex Restaurants Inc.’s corporate credit rating was slashed to ‘D’ from ‘CC’ on Oct. 4 after the Cypress, Calif.-based restaurant chain filed for Chapter 11 bankruptcy filing.

Wastequip Inc.’s rating was reduced to ‘SD’ from ‘CCC’ on Oct. 19. The ratings agency said it cut its view on the Charlotte, N.C.-based waste handler and recycling equipment maker based on confidential information it received regarding the portfolio company’s unrated mezzanine loan. Wastequip is sponsored by both Carlyle Group LLC and Odyssey Investment Partners LLC. Since the “weakest links” report was released, S&P has upgraded its rating on Wastequip. On Nov. 23, it raised its long-term corporate credit rating on the business to ‘CC’ from ‘SD’. “The rating actions follow Wastequip’s amendment of its unrated mezzanine loan that cured an event of default under the facility,” S&P Credit Analyst Gregoire Buet said.

One of the others that fell in with the crowd is J.C. Flowers & Co. LLC’s MF Global Ltd., which is now operating in bankruptcy protection due to its exposure to the European debt crisis. On Oct. 31, sister Web site peHUB reported that J.C. Flowers’s potential loss from MF Global is $47.8 million.

The other was Travelport Holdings Ltd., which is backed by Blackstone Group LP, One Equity and Technology Crossover Ventures. S&P downgraded the travel services provider to ‘SD’ from ‘C’ on Oct. 5 following a capital restructuring at the Atlanta, Ga.-based company. Nine days later, S&P raised its rating on the business to ‘B-’ from ‘SD’ and revised the outlook to stable. The ratings agency said that the upgrade reflects Travelport’s improved liquidity position.

In addition, Buyouts has been keeping tabs on LBO-sponsored companies that filed for bankruptcy protection under Chapter 11 of the U.S. bankruptcy code. To date, we’ve counted 18. None have filed for protection in the fourth quarter and two submitted the paperwork in the last days of October, including Perseus LLC’s Beacon Power Corp. The maker of flywheel energy storage systems cited its inability to secure more investments for seeking Chapter 11. In its filing, Tyngsboro, Mass.-based Beacon Power reported $72 million in assets and $47 million in debts. Many of the portfolio companies that filed for bankruptcy this year are in the retail/restaurant industry.

Despite continuing pressures, a few portfolio companies emerged from Chapter 11. Summit Business Media Holding Co. exited from bankruptcy in May. The insurance and financial information provider cut $140 million in debt from its balance sheet through the proceedings. It filed for protection in January; Wind Point Partners is no longer a sponsor of the Erlanger, Ky.-based company.

Sbarro Inc. received court approval for a reorganization that paved the way for the pizza chain to emerge from Chapter 11 on Nov. 28, 2011. Interim President and Chief Executive Officer Nicholas McGrane said in a press release, “When we emerge from bankruptcy, our debts will have been reduced by approximately 70%, and we will have access to $35 million in fresh capital provided by our new ownership group.” Sbarro is no longer a part of MidOcean Partners’ portfolio.

Weston Presidio continues to keep Nebraska Book Co. in its portfolio. The college bookstore chain filed for Chapter 11 in June and reported assets of $657.2 million and debt of $564 million as of Feb. 14. The filing came after five of its suppliers wanted to be paid in advance and in cash for orders. Nebraska Books received court approval for its bankruptcy plan in August.