Fewer Portfolio Companies In “Weakest Links” List

The number of sponsor-backed companies in Standard & Poor’s “weakest links” report has fallen since May, when Buyouts last covered the report, as the outlook for a number of buyout-backed investments has improved.

Of the 133 companies on the list with combined debt of $146.07 billion, Buyouts identified 36, with combined debt of $56.1 billion, as being LBO portfolio companies, as of Aug. 16. The June version of the report listed 41 sponsor-backed “weakest links,” with combined debt of $65.5 billion, out of 161 companies with combined debt of $168.4 billion. And the February version listed 48 sponsor-backed “weakest links,” with combined debt of $74.1 billion, out of 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 report, titled “S&P Global Bond Markets’ Weakest Links And Monthly Default Rates.”

Four portfolio companies joined the “weakest links” report since the June listing. Crestview Partners’s Symbion Inc., an operator of outpatient surgical centers, was downgraded to ‘B-‘ in May because of weak reimbursement trends and a fragile U.S. economy. S&P said it expects the company will struggle to meet its bank covenant requirements. Lime Rock Partners’s Hercules Offshore Inc. saw its credit rating lowered to ‘B-‘ in June because competition and the Gulf of Mexico oil spill hurt demand for the company’s rigs. S&P placed its ‘B-‘ rating on Apax Partners’s Contech Construction Products Inc. in June. The ratings agency said the civil engineering service company has less of a cushion supporting its financial covenants due to weaker-than-expected operating results. S&P revised its outlook on Fenway Partners’s Coach America Holdings Inc. to negative in July. Its rating on the bus operator remains at ‘B-‘. The revision reflects S&P’s concerns that the company could breach covenants soon if operating results don’t improve or if Fenway Partners doesn’t provide a cash infusion.

Industry-wise, media and entertainment saw the highest number of portfolio companies in the “weakest links” group, with seven making the list. Health care came in second with four. Retail and restaurants ranked third with four each on the list. The chemicals, packaging and environmental services; consumer products; and oil and gas exploration and production sectors all had three on the August list.

Four companies backed by The Carlyle Group appeared in the August “weakest links” report, making the Washington, D.C., firm the most represented sponsor in the report once again, according to our analysis. Kohlberg & Co. came in second with three investments on the list. The six other firms with at least two portfolio companies 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 54 companies with either a ‘D’ (default) or ‘SD’ (selective default) rating so far this year. From that pool, Buyouts found 14 with LBO sponsors, representing total affected debt of $5.4 billion.

In mid-August, Energy Future Holdings, owned by Kohlberg Kravis Roberts & Co., TPG and GS Capital Partners, saw itself downgraded to ‘SD’ from ‘CC’ because, although it completed an exchange of $3.6 billion of notes due in 2017, S&P viewed the exchange as distressed and the equivalent of a default. However, S&P expects to raise the rating to ‘B-‘ with a negative outlook soon to reflect “very weak financial performance and very large refinancing risk.”

Separate from S&P’s “weakest links” reports, Buyouts has tracked 18 portfolio companies that filed for bankruptcy protection this year, including two which did so in July. Apollo Investment Corp.’s Innkeepers USA Trust, a real estate investment trust, filed for bankruptcy protection because of “crippling debt that hurt its ability to maintain and upgrade its properties,” according to Reuters. The company has $1.29 billion in secured debt and has defaulted on all 11 of its loans.

Warburg Pincus LLC’s Medical Staffing Network Holdings Inc., which provides staffing services for health care facilities, agreed to sell itself to its secured lenders for $84.1 million and filed for Chapter 11 protection, Reuters said. The company has assets of $10 million to $50 million and liabilities of $100 million to $500 million. Warburg Pincus Private Equity VIII LP owns more than 45 percent of its stock.

And in September, Claim Jumper Restaurants LLC, a portfolio company of Leonard Green & Partners, filed for a pre-packaged bankruptcy, saying that it would sell itself to an affiliate of Canyon Capital Advisors LLC, Reuters reported. Existing lenders agreed to provide debtor-in-possession financing.