Roll Call Of Troubled Portfolio Companies Grows

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 Carlyle Group LLC, had the most portfolio companies on the latest “Weakest Links” report, with at least four. They include Frontier Drilling ASA (co-owned with Riverstone Holdings LLC), Hawaiian Telcom Communications Inc., LifeCare Holdings Inc., and Water Pik Technologies Inc. Goldman Sachs & Co., through its buyout arm GS Capital Partners, counts at least three investments in the report. Bain Capital Inc., Cerberus Capital Management LP, Fenway Partners LLC and Sun Capital Partners Inc. all have at least two companies on the list.

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 Apollo Management LP-backed company added because of the retailer’s “poor performance” over the past year, S&P said. For its fiscal year ended Feb. 2, Claire’s Stores reported in a press release that its same-store sales fell 1.8 percent from a year ago.

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 Castle Harlan Inc.’s portfolio.

Perseus LLC’s Workflow Management Inc. unit joined the list in the last three months after S&P said it became concerned with the print and promotional products provider’s “relatively tight cushion” against amended financial covenants. Meantime, tight liquidity during a difficult sales environment in the North American and European automotive industries sent Hilite International Inc. on to the list. The ratings agency does not expect the maker of engineered components and assemblies to generate any material free cash flow from operations until at least 2009. Hilite is an investment of Blue Point Capital and Kelso & Co.

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 Apollo Investment Corp.’s Web site (Quad-C Management Inc. is noted as the sponsor), cracked the list in May. Since then, the lighting company has been cut further to ‘CCC-‘ because of continued weak operating performance.

Spectrum Equity investor’s Arrowhead General Insurance Agency Inc. unit joined recently because of its inability to meet financial-performance goals and continuing soft market conditions, among other reasons, S&P said. Summit Partners‘s Airborne Health Inc. unit, a maker of natural cold and flu tablets, had its outlook lowered to negative from developing in April because of a delay in requesting an amendment to a credit facility, and on continued weak operating performance.

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 Thoma Bravo‘s portfolio company Consona Corp., was added to the list because of weaker-than-expected operating performance and limited financial flexibility. Weak liquidity and operating results are why S&P added Alliance Film Holdings Inc. to the list. The Toronto-based entertainment company is a portfolio company of Goldman Sachs & Co.’s GS CapitaI Partners VI LP and of Edgestone Capital Partners.

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 Thomas H. Lee Partners; Vought Aircraft Industries Inc., a Dallas-based aerospace supplier backed by the Carlyle Group; and Duane Reade Inc., a New York-based drug store chain in Oak Hill Capital Partners LLC‘s portfolio.

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 Apollo Management Group. Recycled Paper Greetings Inc. is a Chicago-based maker of greeting cards that is part of Monitor Clipper Partners’s portfolio.

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.