“Weakest Links” List Snares Fewer Portfolio Companies

The number of buyout-backed investments listed in Standard & Poor’s “weakest links” report, published in May, has declined since Buyouts last reported on the February version of the report, as the outlook for several sponsor-backed companies has improved.

Of the 161 companies on the list with combined debt of $168.4 billion, Buyouts identified 41 (with combined debt of $65.5 billion) as being LBO portfolio companies as of May 14. The February version of the report listed 48 sponsor-backed “weakest links,” with combined debt of $74.1 billion, out of a total 213 companies on the list with combined debt of $197.5 billion.

To be considered a “weakest link,” a company must have a speculative credit rating of ‘B-’ or lower along with a negative outlook or a negative CreditWatch implication, according to the “S&P Global Bond Markets’ Weakest Links And Monthly Default Rates” report.

Two portfolio companies were added to the “weakest links” report since the February listing. GTCR Golder Rauner LLC’s Graceway Pharmaceuticals was downgraded to ‘B-’ in March due to competition-related concerns from a generic version of the Bristol, Tenn.-based company’s Aldara skin cream. Oaktree Capital Management LLC’s Cannery Casino Resorts LLC was also downgraded to ‘B-‘ in March after its 2009 performance didn’t meet the ratings agency’s forecast.

S&P removed nine portfolio companies from the “weakest links” list during the past three months. These businesses had combined debt worth $10.5 billion in February. Three of the companies had debt of at least $1 billion each. NXP BV, backed by Kohlberg Kravis Roberts & Co. and Bain Capital, had the largest level of debt at $5.4 billion. In March, S&P revised its outlook on the Dutch chip maker’s rating to stable from negative.

Uplifted performance outlooks since February accounted for most of the sponsor-backed removals from the most recent “weakest links” report.

Industry-wise, media and entertainment remains the most vulnerable to debt-related default. The sector saw 10 such defaults in May, S&P said. Retail and restaurants ranked second in terms of the number of defaults with seven. The ranking of these two industry sectors remained unchanged since February. The consumer products; health care; and chemicals, packaging and environmental services sectors listed four defaults each in the latest report.

Five companies backed by The Carlyle Group appeared in the May “weakest links” report, making the Washington, D.C. firm the most represented sponsor in the report, according to our analysis. Kohlberg & Co. came in second place with three investments on the list. The six other firms with at least two businesses on the list were Bain Capital Inc., Castle Harlan Inc., Diamond Castle Holdings LLC, GS Capital Partners, MidOcean Partners and Spectrum Equity LLC.

As for defaults, S&P tagged 34 companies with either a ‘D’ (default) or ‘SD’ (selective default) rating between Jan. 1 and May 14. From that pool, Buyouts spotted seven with LBO sponsors. Electrical Components International Inc., which Francisco Partners acquired in 2006, is the most recent sponsor-backed addition to the May report. S&P downgraded the St. Louis, Mo.-based maker of wire harnesses to ‘D’ from ‘CCC-‘ on March 31, after the company (with affected debt of $340 million) filed for Chapter 11 bankruptcy protection.

The total debt of the 34 companies that were stamped this year with either a ‘D’ or ‘SD’ rating is $12.6 billion. The seven companies with LBO backers represent total affected debt of $2.6 billion.

Since the May report, two more portfolio companies have been downgraded to either ‘D’ or ‘SD’. S&P cut Sagittarius Brands LLC to ‘SD’ from ‘CC’ on May 25, after subordinated noteholders reduced their claims against the Charlesbank Capital Partners portfolio company substantially below original face value. The rating, however, was lifted to ‘B’ a couple days later to reflect the sale of Sagittarius Brands’s Captain D’s restaurant business and other restructuring efforts. The other downgrade involved Citigroup Private Equity’s Network Communications Inc., which was downgraded to ‘D’ after it missed a June 1 interest payment.

Separate from S&P’s “weakest links” reports, Buyouts has tracked a total of 12 portfolio companies that filed for bankruptcy protection this year—two of which did so during the second quarter. Barcalounger Corp., a maker of reclining chairs owned by Hancock Park Associates since 2006, filed for Chapter 11 protection on May 19 after declining furniture sales had eaten away the company’s profits. Going forward, Hancock Park will seek to purchase Barcalounger’s assets for $1.5 million.

The second sponsor-backed Chapter 11 filing of the quarter came from TriDimension Energy LP, an oil and gas drilling company backed by HM Capital Partners LLC. The Dallas-based company said the filing was based on its financial condition, and that it is reviewing strategic alternatives, such as the sale of the company or of its assets. Stephens Inc. and FTI Consulting Inc. are advising the company.