LBO Fingerprints Found On June Defaults

If a U.S.-based company fell into default last month, chances were nearly 50/50 that it was backed by a buyout shop.

Of the 18 total U.S.-domiciled companies that defaulted on their debt in June, at least eight them, nearly 45 percent, were portfolio companies of LBO sponsors at the time of their transgressions.

This latest batch of monthly defaulters helped raise the U.S. trailing 12-month speculative-grade default rate to 9.16 percent as of the close of June, up more than a full percentage point from the 8.13 percent in May, and dwarfing the 2 percent rate that held sway in June 2008, according to Standard & Poor’s most recent U.S. Credit Metrics Monthly report.

“We expect the speculative-grade default rate to escalate to a mean forecast of 14.3 percent by May 2010, but it could reach as high as 18.5 percent if economic conditions are worse than expected,” S&P said.

At the close of the second quarter, a total of 119 U.S.-based companies tracked by S&P had defaulted on their debt. Forty-three of those entities were portfolio companies of U.S.-based buyout firms, according to further analysis by Buyouts. On a global basis, 45 companies backed by U.S. sponsors were found in default as of June 30, 2009.

The stories behind most of June’s LBO-backed defaults are remarkably similar. Seven of the eight U.S. companies that defaulted last month did so because they repurchased portions of their own debt at discounts to par deemed so steep that they were considered distressed exchanges, which S&P considers tantamount to default.

Enticed by the steep discounts in the secondary market and the strategic strength of having less leverage on their balance sheets, sponsor-backed companies have been voraciously acquiring and retiring their own debt.

Among the June class of debt buybacks, Sabre Holdings Corp., a provider of online travel services including that’s backed by Silver Lake Partners and TPG, repurchased $76 million in principal amount of its senior notes due 2011 at a cost of $44 million.

Elsewhere, Apollo Management’s Momentive Performance Materials Inc. retired approximately $231 million of its senior unsecured notes for 62.5 cents on the dollar, in addition to retiring $118.1 million of its senior subordinated notes at a price of 40 cents on the dollar.

The only sponsor-backed company that defaulted last month for reasons unrelated to a debt repurchase was Cooper-Standard Automotive Inc., a maker of automotive components that’s backed by The Cypress Group and GS Capital Partners. On June 15, the Novi, Mich.-based company failed to make interest payments due that day on its 7 percent senior notes due in 2012 and its 8.375 percent senior subordinated notes due in 2014. S&P lowered its rating on the company to ‘D’ from ‘CC’.