An economy that continues to squeeze the average consumer has led to more portfolio companies joining Standard & Poor’s monthly “Weakest Links” list.
Forty-six companies with LBO-backers made the list released May 16, representing total debt of about $26.5 billion. That’s up from 42 companies representing total debt of $27.2 billion in March, the last time Buyouts conducted its quarterly review of the list. All told, the May “Weakest Links” list included 130 companies worldwide (with $127.4 billion in affected debt). It is the highest tally in the past five years, a rise that stems in part from volatility in the credit markets and what feels like an unfolding recessionary.
To qualify for the list, companies must have corporate credit ratings of ‘B-‘ or lower, with either a negative outlook, or ratings with a negative CreditWatch implication. S&P considers these companies, out of all those that it rates, the most likely to default on their obligations in the coming months.
Consumer products, retail/restaurants and media and entertainment continue to account for more than their fair share of weak links. Half of the 46 portfolio companies operate in these sectors—10 in the consumer products industry, eight in restaurants/retail, and five in media and entertainment.
One of the world’s largest buyout shops, The
Since our last look at the “Weakest Links” list three months ago, we’ve added 15 portfolio companies to the list, while 11 have dropped off. Most of the additions reflect companies that S&P added to the list during that time. However, we also identified two older weak links owned by LBO shops that we were not previously aware of.
Among those new to the list is Claire’s Store Inc., an
S&P added Frontier Drilling ASA to the list on concerns about the Carlyle- and Riverstone Holdings-backed marine contract driller’s ability to fund its capital spending program this year. S&P raised its rating on Caribbean Restaurants LLC in April to ‘B-‘, but gave it a negative outlook. Buyouts reported in its May 12 edition that Caribbean Restaurants has more breathing room after it secured amendments to credit facilities. The Puerto Rico-based Burger King franchise operator is part of
Quality Home Brands Holdings LLC took its place on the list because of poor operating performance in 2007 and S&P concerns that the lighting company won’t meet financial covenants this year. Quality Home Brands, which is listed as a portfolio company on
Sun Capital Partners’s Indalex Holdings Corp. unit joined the list on March 21, after S&P rated the company ‘B-‘ with a negative outlook and on negative CreditWatch. The rating reflects deteriorating operating performance thanks to weak end-market demand. On May 30, the aluminum extruder was removed from CreditWatch because S&P views the company as having adequate liquidity to support operations and working capital needs for the next few quarters.
Consona ERP Inc., a business software and service provider that is a unit of
Residential Capital LLC was added to the list after S&P cut the rating on the real estate finance company on May 2, following the launch of an unsecured bonds exchange offer. The downgrade reflected the probability that the exchange offer would lower Residential Capital’s corporate credit rating to ‘Selective Default,’ which did in fact happen to the Cerberus Capital Management LP-backed company on June 5.
Ten portfolio companies have been bumped off the “Weakest Links” report because of improved outlooks, withdrawn ratings, defaults or acquisitions.
Among those with improved outlooks, Perkins & Marie Callenders’ Inc. left the list in March after the ratings agency upgraded its outlook on the Memphis, Tenn.-based restaurant chain to stable to reflect an amended credit agreement. However, the Castle Harlan-backed company is returning because the outlook reverted to negative in June thanks to deteriorating performance.
Ames True Temper Inc. came off the list when S&P changed the outlook on the Camp Hill, Pa.-based maker of lawn and garden products to stable because of improved liquidity. Ames True Temper is sponsored by Castle Harlan. Other companies whose improved performance merited removing them from the list include Spectrum Brands Inc., an Atlanta-based battery maker owned by
On the other hand, two portfolio companies, Linens ‘n Things Inc. and Recycled Paper Greetings Inc., saw their performance head the other direction, leaving the list only because they actually went into default. Linens ‘n Things Inc. is a Clifton, N.J.-based bedding and home furnishings retailer backed by
All told, S&P said 28 companies have defaulted worldwide so far this year, surpassing the 22 recorded for all of last year. The number with LBO-backers more than doubled to 13 from the six identified three months ago. A list of LBO-backed companies that have filed for bankruptcy protection under Chapter 11 of the U.S. bankruptcy code appeared in Buyouts‘ June 9 issue.