Just 17 Portfolio Companies Flirting With Default

The latest monthly report, published Aug. 30, Global Weakest Links And Default: Weakest Links Count Remains Flat At 128, looked at the ratings from eight days earlier. Inclusion in the main “weakest links” list requires a speculative corporate credit rating of ’B-’ or lower plus a negative outlook, a CreditWatch with a negative implication, or both.

All told 128 entities made the latest “weakest links” list, and these had total debt of $237 billion. In May, 126 were considered at risk and these combined for $196.9 billion in debt. From the latest pool, Buyouts identified at least 17 with LBO backers, which is one less than we previously counted three months ago, and down from 23 a year ago. The total debt of the 17 portfolio companies was $46.1 billion, more than the $42.9 billion debt associated with the LBO-sponsored businesses in the May report, but far less than $134.8 billion of a year ago.

Energy Future Holdings Corp.’s debt, at $36.5 billion, accounts for a good portion of the August tally, as it did a year ago when it stood at $101.5 billion. Energy Future Holdings is backed by Kohlberg Kravis Roberts & Co., TPG Capital, Quintana Capital Group LP and AXA Private Equity SA of France.

The spike in debt owed by buyout-backed companies in August 2011 turned out to be temporary, as debt levels fell back to around $45 billion in the November report and has remained in this vicinity since.

Who Is In

The 17 LBO-backed companies in last month’s “weakest links” list are concentrated in nine business sectors, with media and entertainment accounting for four of the entries. Vestar Capital Partners Inc.’s MediMedia USA Inc. is the latest addition for this group. S&P cut the Yardley, Pa.-based company’s rating to ’CCC+’ from ’B-’ in May based on its view that MediMedia may face “limited liquidity and little cushion with covenant compliance levels.” MediMedia has $15.3 million of its $45 million revolver due in the fourth quarter.

The chemicals, packaging, and environmental services sector, as well as the forest products and building materials sectors are the only other two with at least three LBO-backed companies. The Carlyle Group’s Synagro Technologies Inc. was an addition to the chemicals segment. S&P cut the biosolid recycler’s rating to ’CCC’ from ’CCC+’ in August, citing the portfolio company’s “highly leveraged” financial risk profile and “weak” liquidity. 

The other additions to the list during the past three months were Thomas H. Lee Partners-backed inVentiv Health Inc. and Huntsman Gay Global Capital LLC’s iQor Holdings Inc. S&P downgraded inVentiv’s corporate credit rating to ’B-’ from ’B’ in June after the portfolio company reported first-quarter cash flow below the ratings agency’s forecast. IQor was added to the list after S&P revised the company’s outlook to negative from developing in August, citing tight covenants at the process outsourcing concern.

Defaults And Chapter 11s

S&P reported 54 issuers defaulted through Aug. 22, and they have a combined debt of $58.7 billion. The tally rose from the 35 entities and $41.9 billion in debt identified,as of May 21. Ten of those have financial sponsors, three more than counted three months ago. Debt for LBO-backed defaulters now stands at $8.66 billion. S&P issued either a ’D’ or ’SD’ rating on these entities.

Carlyle Group’s LifeCare Holdings Inc. received a ’D’ rating because it failed to make an interest payment. ArcLight Capital Partners LLC’s ATP Oil & Gas Corp. received the same rating after it filed for Chapter 11. (Both downgrades occurred in August). ATP Oil said the moratorium on deepwater drilling in the Gulf of Mexico following the oil spill in 2010 hurt its business.

S&P issued a ’D’ rating on Broadview Networks Holdings Inc. in July, after the portfolio company said it would extend its revolving credit facility from the Aug. 1 to Sept. 5. The ratings agency said this is tantamount to a default. Broadview is backed by Baker Capital, MCG Capital Corp. and New Enterprise Associates Inc. On Aug. 22, Broadview filed for bankruptcy protection.

This Chapter 11 frontier was quiet during most of the third quarter. However, at least four portfolio companies filed in mid-August and the tally so far this year is now at 17.

In addition to the two filers noted before, medical imaging company Gamma Medica-Ideas Inc. sought bankruptcy protection after it failed to find a buyer. The Northridge, Calif.-based company is sponsored by Capital Resource Partners. Bain Capital LLC’s Contec Holdings Ltd. also filed for Chapter 11. The cable-box repair company attributed its decision to weak demand, resulting from a weak economy and increased competition.