Few Positives Found In Thinning Of Weakest Links List

On the surface, a decrease in the number of companies on the “weakest links” report produced by Standard & Poor’s sounds like progress. Unfortuntately, the ranks were thinned not by companies seeing their finanical situations improve, but by those that succumbed to default. And sponsor-backed companies were no exception.

S&P’s “weakest links” list reached an all-time high of 300 companies in April before falling to 293 in mid-May. The remaining 293 companies have combined debt of $468.98 billion. To qualify for the list, companies must have speculative corporate credit ratings of ‘B-‘ or lower with either a negative outlook or with a negative CreditWatch implication.

At least 60 issuers that made it onto the current “weakest links” list are portfolio companis of U.S. buyout shops. Combined, these companies have total debt of $77.553 billion. These two figures are down from two months ago, when we last reported on the S&P report. At that time, the number of LBO-backed weak links had swelled to 78 companies representing total affected debt of about $130 billion.

From an industry perspective, the retail and restaurant sector had the largest LBO representation in the latest tally with 11 sponsor-backed issuers listed in that category. Next up was media & entertainment, which had 10 weak-link portfolio companies assigned to it. That was followed by a four-way tie between capital goods, chemicals, packaging and environmental services and health care, which had five each.

The consumer products sector, which has made up a large portion of recent “weakest links” listings, had just two companies in the May report, down from eight in March.

Seven portfolio companies were added to the list, including two recently identified as having LBO backers, including Highland Capital Management LP’s Gray Television Inc. unit.

Bain Capital Inc.’s Sensata Technologies BV unit is the newest entry with the largest amount of affected debt. The Attleboro, Mass.-based company has debt of $2.462 billion. S&P raised its corporate credit rating on the designer of sensors and controls to ‘CCC+’ from ‘SD’ on April 1. The revision followed Sensata’s repurchase of $168 million of its own debt.

Among sponsors, Carlyle Group LLC and Bain Capital each had the most investments (five) in the latest “weakest links” report. Apollo Management LP and Warburg Pincus LLC followed with four each, while TPG and DLJ Merchant Banking Partners both had three businesses on the list.

The other shops with at least two investments in the May report are: The Blackstone Group LP, Castle Harlan Inc., CI Capital Partners LLC, Francisco Partners, Goldman Sachs & Co.‘s GS Capital Partners, Kohlberg Kravis Roberts & Co., Leonard Green & Partners and Providence Equity Partners Inc.

The decrease in the “weakest links” list’s size would suggest an improvement, that is until the number of defaults that have occurred during the past two months are factored in. Fifteen of the 20 new defaulters were previously in the “weakest links” list.

In 2009, S&P said a total of 121 issuers have defaulted on debt worth a total of $297.22 billion through May 13, a tally that includes confidentially-rated entities. Within that bunch, Buyouts has identified 32 LBO-backed defaulters representing debt of about $76.3 billion. S&P’s previous “weakest links” report, released in March, tracked a total of at least 39 defaulters representing debt of $44 billion. Of that earlier bunch, Buyouts identified a dozen entities backed by LBO firms representing debt of $14.7 billion.

A closer look at the numbers reveals the 32 sponsor-backed defaulters have almost as much debt as the 60 LBO-backed companies remaining on the “weakest links” report. Cerberus Capital Management LP‘s Chrysler LLC added $22.5 billion to the affected debt of the defaulters on April 30, 2009, when S&P downgraded the auto maker to ‘D’ after it filed for bankruptcy protection. On June 10, Cerberus completed the sale of Chrysler to Fiat SpA. Another portfolio company that contributed to the growth was Freescale Semiconductor Inc., with debt of $11 billion. Freescale is backed by Blackstone Group, Carlyle Group, HarbourVest Partners LLC and TPG.

With three defauted portfolio companies, TPG had the most entries in S&P’s list of corporate defaults in 2009. ABRY Partners LLC, Apollo Management, Bain Capital, Banc of America Capital Investors, Carlyle Group and Sun Capital Partners Inc. all had at least two.

But at least one portfolio company that moved into the list of defaulters is now slated to return to the ranks of “weakest links” companies. S&P downgraded Carlyle Group’s Synagro Technologies Inc. to “SD” on April 27, 2009, after the Houston-based waste disposal company’s distressed debt exchange. Synagro’s corporate credit rating was upgraded to ‘CCC+’ on June 4, 2009. The new rating reflects changes in the portfolio company’s capital structure after it completed a tender offer for its second-lien notes.

Improved outlooks and withdrawn ratings are other reasons why some portfolio companies were crossed off the “weakest links” list. S&P withdrew its rating on some investments, such as Kelso & Co.’s Endurance Business Media. GTCR Golder Rauner LLC’s Wilton Products Inc. and Bain Capital’s Burlington Coat Factory Warehouse Corp. moved off the S&P report after the rating agency revised its outlooks on the two investments to either developing or stable from negative.

Separately, Buyouts has tracked at least 46 portfolio companies that filed for bankruptcy protection this year. Two months ago, there were at least 28 on the list. The slump in the auto industry and decline in consumer spending due to the recession are the main contributing factors to the increase in the number of bankruptcy filings. Sun Capital currently has seven investments on the list of bankruptcy filers. Lone Star Funds, Argosy Partners and HIG Capital Management are the other shops with more than one investment that filed for bankruptcy protection so far in 2009.