The number of LBO-backed companies that Standard & Poor’s considers most in danger of defaulting on their debt continues to dwindle, according to the ratings agency’s latest “weakest links” report. The count trickled down to 19 from the 24 Buyouts magazine identified three month ago.
The report, “Global Weakest Links And Default Rates: Weakest Links Are Unchanged And Default Rates Increase Slightly In April,” was published on May 26. Entities included in the ‘weakest links’ list have a speculative corporate credit rating of ‘B-’ or lower. These companies also had a negative outlook, a place on CreditWatch with a negative implication, or both on as of May 19.
S&P identified a total of 105 “weakest links” entities in the May report, with affected debt of $140 billion. In the February report, the ratings agency tagged 111 companies as “weakest links,” and they had total debt of $147.68 billion.
Buyouts identified at least 19 LBO-backed companies with combined debt of $43.68 billion on the May list. The 24 companies with LBO sponsors we reviewed in the February report had total debt of $50 billion. Five of the seven exits of PE-backed companies from the list (against two additions) resulted from improved outlooks, including First Reserve Corp.’s Turbo Alpha Ltd., which had its rating withdrawn after the outlook moved up to developing from negative.
El Pollo Loco Inc. was one of only two PE-backed entries to the “weakest links” list. The company (backed by Freeman Spogli & Co. and Trimaran Capital Partners LLC) was added to the list in March because of an upcoming debt payment and weak liquidity at the chicken chain. “The negative outlook reflects our opinion that El Pollo Loco’s liquidity sources are unlikely to cover its cash uses,” S&P credit analyst Andy Sookram said at the time.
A day after the latest “weakest links” report was issued, S&P raised El Pollo Loco’s rating to ‘CCC” from ‘CC’ after the portfolio company said it made the interest and bond redemption payments using existing cash and proceeds from a capital contribution from its ultimate parent, Chicken Acquisition Corp.
The addition of El Pollo Loco looks to be a short-term event, as S&P raised its rating on the company to ‘B-’ on June 9. The rating outlook was also switched to stable from negative. These revisions came on the heels of the company’s debt-refinancing plans. “The rating actions reflect our expectation that the refinancing will lead to better financial flexibility and enhanced liquidity,” said Sookram, “by extending El Pollo Loco’s debt maturities and lowering its interest expense burden.”
Shearer’s Foods Inc., which is sponsored by Mistral Equity Partners and Prospect Street Ventures, is the only other addition. S&P cut Shearer’s rating to ‘B-’ from ‘B’ in March. S&P said the EBITDA cushion on the snack maker’s total leverage and senior leverage covenants would be very limited for the first quarter. The ratings agency placed its rating on Shearer’s on CreditWatch with a negative implication on May 22, 2011. S&P believed the company might have a liquidity shortfall in the near term.
Perkins & Marie’s Callender’s Inc. was one of the portfolio companies cut from the list, but not in a good way. The Castle Harlan Inc.-backed restaurant chain was the first LBO-backed company to default on a debt during the second quarter. S&P downgraded the Memphis, Tenn.-based company to ‘D’ from ‘CC’ on April 7, after a missed an interest payment on senior unsecured notes.
In total, three portfolio companies received either a ‘D’ or ‘SD’ rating from S&P during the latest quarter. This brings the year-to-date tally to four. Keystone Automotive Operations Inc. got included on this list in late April. It was added to Platinum Equity LLC’s portfolio less than a month earlier (on March 30) when the Los Angeles, Calif.-based shop bought a majority stake in the auto parts distributor.
The largest addition to the defaulter’s ranks is Texas Competitive Electric Holdings Co. LLC (Energy Future Holdings Corp.) Energy Future is backed by Kohlberg Kravis Roberts & Co., TPG and GS Capital Partners. It added $32.46 billion in debt to the ranks of defaulters.The debt of the four LBO-backed defaulters totals $33.6 billion. There was only $333 million the last we reviewed this list. At the time, the only defaulter was MidOcean Partners’ Sbarro Inc. Energy Future Holdings continues to remain on the “weakest links” list.
According to the May report, media and entertainment is the industry most susceptible to a default by an LBO-backed company. There are four representatives in the latest listing. The sector held the top spot in February 2011 with five companies on the list. The only other sector with at least three representatives is the chemicals, packaging and environmental services area.
Separately, Buyouts has tracked the LBO-backed companies that sought protection under the U.S. Bankruptcy code. Three businesses filed for protection during the second quarter through June 8, bringing the year’s tally to seven.
Sbarro was the first. The pizza chain filed for protection on April 4. Its business was hurt by the recession, which has led many consumers to spend less shopping; Sbarro’s locations are typically in shopping malls. Sbarro, which MidOcean acquired back in 2007, is also being squeezed by increased expenses from the higher commodities costs.
Sigg Switzerland USA Inc. was one of the other filers. The company, which filed for bankruptcy protection on May 20, 2011, is fighting allegations that the plastic linings of its early bottles contained trace amounts of the chemical bisphenol A, or BPA, that has been linked to diseases. Riverside Co. bought the maker of aluminum drinking bottles through Riverside Europe Fund II in November 2003.
A positive development on this otherwise dismal front: One of the companies that entered bankruptcy protection during the first quarter, Wind Point Partners’s Summit Business Media Holding, made its exit through a pre-arranged reorganization on May 20. Summit Business used its reorganization to cut $140 million in debt from its balance sheet.