S&P includes entities on the ‘weakest links’ list if they have a speculative corporate credit rating of ‘B-’ or lower, plus a negative outlook, a CreditWatch with a negative implication or both.
Overall, the number of entities around the world on the list has dropped slightly over the last three months. In S&P’s latest report, which was published March 7, there are a total of 149 entities with debt of $235.3 billion. The last time Buyouts magazine reviewed the list in December, the tally stood at 145 and these entities had debt of $233.2 billion. The count was based on ratings in mid-November.
The 20 portfolio companies in the most recent report and had an aggregate debt of about $48.6 billion. The LBO-backed companies in report published Dec. 3 stood at 17 had combined debt of $46.1 billion.
Over the past three months, four new portfolio companies were added to the listing, while inVentiv Health Inc. left. This came after S&P revised the Burlington, Mass.-based company’s outlook to stable from negative on Dec. 10. Thomas H. Lee Partners is a sponsor of the contract research organization. S&P said at the time that inVentiv’s stable outlook reflects the agency’s forecast that ”low-single-digit organic revenue growth will be insufficient to reduce leverage meaningfully from current levels, even with our base-case expectation of improvement in EBITDA margin.”
The four additions come from different industry sectors. Altegrity Inc. added the most to total debt. It contributed more than $2 billion to the tally. The Falls Church, Va.-based holding company has backers in Apollo Management LP’s Apollo Investment Corp. affiliate, Goldman Sachs & Co. and Providence Equity Partners LLC. S&P downgrade Altegrity’s corporate credit rating to ‘CCC+’ from ‘B-’ in late January, citing continued business challenges. At the time, S&P said the portfolio company’s “current capital structure is unsustainable without a marked improvement in profitability.” The ratings agency doesn’t expect profit growth because of the business’s dependence on the U.S. government. S&P said nearly 40 percent of Altegrity’s revenue comes from this source.
None of the other additions contributed much to the total debt. One of the new entrants is Community Choice Financial Inc. It had debt of $395 million. The Diamond Castle Holdings Inc.-backed company had its ‘B-’ long-term issuer credit rating affirmed by S&P in December. At the same time, the ratings agency lowered Community Choice Financial’s outlook to negative from positive. The change was prompted by a ruling issued by Ohio’s Ninth Judicial District. The court ruled that a single payment installment loan offered by one of the consumer finance company’s competitor didn’t comply with the Ohio Mortgage Loan Act.
S&P Credit Analyst Igor Koyfman said at that time, “Our negative outlook reflects our view that this ruling opens the possibility that CCFI and other payday lenders will eventually be unable to offer single payment installment loans in their current form in Ohio, where approximately 20 percent of the company’s stores are located.” S&P added that it seems conceivable that other district judges or the Ohio Supreme Court could agree with the judges in the Ninth District.
Diamond Castle has been an investor in the Dublin, Ohio-based company since 2006. A Diamond Castle representative said Community Choice has very low leverage, at less than 4x.
Builders FirstSource Inc. was another newcomer. The JLL Partners-backed and Warburg Pincus LLC-backed maker of building products joined the list after S&P affirmed the Dallas company’s ‘CCC’ corporate credit rating and lowered the ratings outlook to negative in late November. At the time, S&P said the change reflects its view that Builders FirstSource “could approach, or possibly breach, its minimum liquidity covenants by the end of 2013, as it draws down its cash balance to fund an expected interest coverage shortfall and increased working capital needs.”
JLL Partners spokesman said in a written statement, “I imagine that there was a time when Builders First Source could have been characterized as a ‘weak link’. However based on revenue and EBITDA trends, BFS’s current liquidity (>$130 million) and the performance of both the company’s bonds and stock price, I cannot imagine BFS being so categorized today.” He added the business had increased revenue by more than 50 percent over the last 8 quarters and EBITDA has improved to more than $6 million in December 2012 from negative $44 million two years earlier.
Despite the latest additions, no firm had more than two portfolio companies in the ‘weakest links’ list. Also, the 20 businesses were spread out over 11 categories. Media and entertainment had the most representatives with four. Chemicals, packaging and environmental services tied for second along with the forest products and building materials group with three each.
Defaults And Bankruptcies
The number of portfolio companies landing on the list of defaulters or filing for bankruptcy has slowed.
Three Energy Future Holdings Corp. subsidiaries received a ‘Selective Default’ rating from S&P in January. Energy Future Holdings is sponsored by Kohlberg Kravis Roberts & Co., TPG Capital and Goldman Sachs. The units are Texas Competitive Electric Holdings Co. LLC with $32.7 billion in debt, Energy Future Intermediate Holding Co. LLC ($8.8 billion) and Energy Future Competitive Holdings Co. (no affected debt). The downgrades followed the completion of several debt exchanges that S&P viewed as distressed.
There were also three portfolio companies that filed for bankruptcy protection over the last three months, plus one that will eventually lead to a buyout shop taking control of a media and entertainment company.
Golden Gate Capital and August Capital’s Conexant Systems filed for bankruptcy protection in February because of weakness in the semiconductor industry, and what it called “outsized and untenable real estate costs.” An affiliate of Soros Fund Management LLC will acquire Conexant after it emerges from bankruptcy. Golden Gate and August Capital purchased the microchip developer and maker for about $200 million in 2011.
OpenGate Capital’s Golden Guernsey Dairy LLC filed for Chapter 7 in January. The milk supplier plans to liquidate because it failed to reduce operating costs. OpenGate Capital bought the business from Dean Foods Co. in September 2011. Avista Capital Holdings LP’s Geokinetics Inc. filed for Chapter 11 in January, as well. The provider of seismic data to the oil and natural gas industry received an investment from Avista Capital in September 2006.
One bankruptcy filing is proving to be an opportunity for Colony Capital LLC. The Santa Monica, Calif.-based firm will become the majority shareholder of LodgeNet Interactive Corp. when it exits bankruptcy protection, which was filed in January. The filing was part of a deal reached in December. A syndicate formed by an affiliate of Colony Capital agreed to provide a $60 million cash infusion to LodgeNet.