More Companies Wave Goodbye To ‘Weakest Links’ List

Fewer portfolio companies made Standard & Poor’s “weakest links” list in February, compared with three months earlier, providing further evidence that the worst may be over for buyout firms in the wake of the Great Recession.

The “Global Bond Markets’ Weakest Links And Monthly Default Rates” report published in February included at least 48 portfolio companies backed by U.S. sponsors, down from the 53 Buyouts identified last November. Entities on the “weakest links” list have speculative corporate credit ratings of ‘B-‘ or lower, as well as either a negative outlook or S&P’s CreditWatch with a negative implication. The falloff was consistent with a drop in the overall number of companies around the world that the ratings agency views as most in danger of debt default. The ranks fell to 213 from the 251 identified in the November report as a wave of improved outlook implications swept a number of entities off the list.

Overall, the 213 entities in the latest report had combined debt of $197.5 billion, down from the $268.4 billion represented by the 251 companies in the November report. Combined, the LBO-backed companies in the February report had total debt of $74.1 billion, down from the $99.2 billion in the November report.

The 11 portfolio companies removed from the “weakest links” list since November had combined debt of $24.1 billion. The removal of Freescale Semiconductor was especially significant because it accounted for $10.4 billion in debt. Freescale is backed by The Blackstone Group, The Carlyle Group, HarbourVest Partners LLC and TPG.

Madison Dearborn Partners‘s and Providence Equity Partners‘s CDW Corp. is another portfolio company that accounted for a good chunk of the debt removed from the February tally. This business had $4.1 billion in affected debt. On Nov. 19, S&P changed its outlook on the Vernon Hill, Ill-based company to stable from negative, citing “stabilization in CDW’s operating performance and expanded covenant headroom.” At the time, the ratings agency also affirmed the ‘B-’ corporate credit rating on the provider of technology products and services.

Improved outlooks accounted for six of the 11 portfolio companies removed in time for the February report. Other causes include a withdrawal (DLJ Merchant Banking Partners’s United Site Services Inc.) and an upgrade. The upgrade came when S&P raised its rating on Centerbridge Capital Partners LP’s Dana Holdings Corp. to ‘B’ from ‘B-’ on Dec. 3 because of improved earnings and cash flow at the Toledo, Ohio-based auto-parts supplier. The move reflects S&P’s view that “Dana’s recent earnings and cash flow improvement will be sustainable into 2010, despite weak auto production volumes that we expect for both light vehicles and commercial vehicles.”

Meanwhile, six portfolio companies joined the “weakest links” list since the November report was released. Of these, only two had debt of at least $1 billion, including First Reserve Corp.’s Turbo Alpha Ltd. with $1.4 billion. S&P has placed the portfolio company on CreditWatch with a negative implication.

Energy Future Holdings Corp.—owned by Kohlberg Kravis Roberts & Co., TPG and GS Capital Partners—stood out among the portfolio companies that remained on the list. The business has a significant presence in the February “weakest links” report because it accounts for more than half of the debt held by all LBO-sponsored entities. The utility had $40.1 billion of the total $74.1 billion debt held by the 48 portfolio companies. S&P raised its rating on Energy Future Holdings to ‘B-‘ from ‘CC’ in November after the Dallas-based holding company completed a $357 million debt exchange.

Among sectors tracked by S&P, “media & entertainment” remains the industry with the most representation on the “weakest links” list, with 11 portfolio companies, up from eight in the November report. “Retail & restaurants” followed with seven, which is one less than the November count.

Four sectors share the distinction of having the third-highest concentration with four portfolio companies each. These sectors are “capital goods”; “consumer products”; “high technology”; and “chemicals, packaging and environmental services.”

Carlyle Group had the most portfolio companies in the latest report with five, down from six investments last November. GS Capital Partners had four on the list, which is the same count back in November. Other LBO shops with at least three businesses in the report were: Bain Capital Inc., Kohlberg & Co. and MidOcean Partners.

So far in 2010, S&P has assigned a ‘D’ or ‘SD’ (default or selective default) rating to 19 companies through March 11. Of those, Buyouts identified at least five with LBO sponsors. The debt of these five combined for about $1.9 billion. During 2009, S&P issued ‘D’ or ‘SD” ratings on 63 LBO-backed companies, and these combined for $160.3 billion in debt. Distressed exchanges accounted for three of the five defaults so far this year. The other two resulted from Chapter 11 filings.

Separate from S&P’s data, Buyouts tracked a total of five portfolio companies that filed for bankruptcy protection thus far in 2010. This list includes MidOcean Partners’s and Wasserstein Ventures’s Penton Business Media Holdings Inc. The magazine publisher filed for bankruptcy protection on Feb. 10 due to a drop in advertising spending and increased competition. On March 5, the company received court approval for its reorganization plan, and it is expected to emerge from Chapter 11 shortly.

In 2009, a total of 83 companies with U.S. LBO sponsors that filed for bankruptcy protection in 2009.