‘Weakest Links’ Roster Continues To Grow Shorter

More and more companies are slipping out of S&P’s “weakest links” list, continuing the year-to-date trend. In fact, the ratings agency said in a report dated Nov. 18 that there has been a decline for 14 consecutive months.

Through Nov. 11, there were 110 entities on the list with combined affected debt of $133.291 billion, according to the report, “Global Bond Markets’ Weakest Links And Monthly Default Rates.” In an Aug. 13 report, the count was 133 companies with debt worth $146.07 billion. Buyouts spotted at least 29 buyout-sponsored companies caught in the latest listing, with debt totaling $53.381 billion. We recognized at least 36 LBO-backed companies with debt of $56.126 billion in August.

The ratings agency tags entities as “weakest links” if they have a speculative credit rating of ‘B-’ or lower, along with either a negative outlook or a negative CreditWatch implication.

There were almost no additions to the sponsor-backed list during the past three months, but a number of deletions took place. The only fresh addition was a company that got released from the “weakest links” list in September, but was hooked back in by the next monthly report. The rating of Carlyle Group LLC and Odyssey Investment Partners LLC-backed Wastequip Inc. was downgraded to ‘Selective Default’ on Sept. 14, after the Charlotte, N.C.-based waste equipment company exercised a “PIK Toggle” feature of its mezzanine loan.

It returned on Sept. 22, when Wastequip’s rating was raised to ‘CCC’ from ‘SD.” The upgrade reflects S&P’s assessment of Wastequip’s business risk and financial profiled following the exercise of the PIK Toggle option. S&P said at the time, “Through 2010, we believe that the equity cure provision and PIK-toggle provision could enable Wastequip to meet the financial covenant requirements under its senior credit facilities.”

Media and entertainment sector remains the most vulnerable sector to debt default. It had six representatives in November, down from seven in August. Both retail/restaurants and consumer products followed with three each. Last time, Buyouts reviewed the report, heath care ranked second with five followed by retail/restaurants with four.

Both Kohlberg & Co. and MidOcean Partners had the most investments in the latest list. Each had three. Five other firms had at least two businesses in the latest report: Bain Capital Inc., Carlyle Group, Diamond Castle Holdings LLC, GS Capital Partners and Spectrum Equity LLC.

Some portfolio companies swam upstream and maneuvered out of the listing by prompting the ratings agency to issue improved outlooks or CreditWatch implications. S&P affirmed its ‘CCC+’ rating, but revised the outlook on Synagro Technologies Inc. to positive from negative in September. The upgrade came as a result of reduced debt, improved profitability and increased headroom under the financial covenants at the Carlyle Group-backed company.

Titan Specialties Ltd., which is also sponsored by Carlyle Group, escaped the “weakest links” list due to an improved outlook. S&P changed the outlook to stable in September, when the rating was raised to ‘B-’ from ‘CCC+’. The corporate credit ratings change reflects increased drilling activity in North America, as well as improved liquidity and credit metrics.

Despite improvements at some companies, others drowned out of the “weakest links” listing and landed in S&P’s bucket of companies with a ‘D’ or ‘SD’ rating. One of these was GTCR Golder Rauner LLC’s Graceway Pharmaceutical LLC, which was downgraded to ‘SD’ on Sept. 17 from ‘B-.’ The Bristol, Tenn.-based company missed an interest payment on a $330 million second-lien loan at the end of August. S&P also reeled in J.W. Childs Equity Partners LP’s Insight Health Services Corp. to the list of defaulters on Nov. 2 after the provider of diagnostic imaging services decided not to make an interest payment on its senior secured floating rate notes due 2011.

In fact, S&P tagged 75 companies with either a Default or Selective Default rating from Jan. 1 to Dec. 2. From this list, Buyouts spotted at least 20 with LBO sponsors and those with known affected debt combined for $54.76 billion. The last time Buyouts reviewed the pool of defaulters, S&P had 54 entities on the list and we identified 14 with LBO sponsors. These 14 had total affected debt of $5.4 billion.

Seven portfolio companies were caught in the net of S&P’s ‘SD’ and ‘D’ ratings since the August report was published, including Energy Future Holdings Corp., which is backed by GS Capital, Kohlberg Kravis Roberts & Co. and TPG. This addition is responsible for the significant increase in total affected debt.

Perseus LLC-backed Workflow Management LLC was a new addition. The provider of business-document services and promotional products was tagged a defaulter after it filed for Chapter 11 bankruptcy protection. Another was APAX Partners Worldwide Ltd.’s Contech Construction Products Inc. It was rated ‘SD’ by S&P because of a distressed exchange in early November. However, S&P has since upgraded its rating on the provider of civil engineering services to ‘B-’ after Contech completed a balance-sheet restructuring and cut its debt by about $240 million.

Separately, Buyouts has tracked 26 portfolio companies that have filed for bankruptcy protection this year. At least eight sought bankruptcy protection since the start of September. Metro-Goldwyn-Mayer attributed the filing to its debt. The film studio is backed by DLJ Merchant Banking, Providence Equity Partners, Quadrangle Group and TPG. Welsh, Carson, Anderson & Stowe’s Local Insight Media LP, a publisher of directories, is also operating under bankruptcy protection.