“To get this amount of participation, I don’t see how that tells sponsors to do anything else but to do more,” a loan investor source who told 9fin.

Lenders from time to time wonder whether or not a particular sponsor is willing to be more aggressive than they’ve been in the past. But time and again, different sponsors, some unexpectedly, will push the limit of what was once considered taboo and then that becomes the norm.

Initially, these so-called liability management exercises (LMEs) were limited to companies in distress — those with near-term liquidity needs, maturities and/or covenant breaches. Yet Apex’s earnings were improving, its first and second-lien loans were due in 2029 and 2030, respectively, and the first lien debt was quoted near 90 cents on the dollar. Even the revolver was not due until 2027.

So what happened? One thing to keep in mind is Bain Capital has owned the company since 2013 and its IRR on the investment was decreasing with each additional year, without outsized growth or return prospects given lower multiples and higher interest rates.

With this transaction, Bain has captured upwards of $200m of discount through the exchange. If it is able to sell the company in the next couple of years, this could dramatically improve its return. This is different than many of the other LMEs for companies that would otherwise file for bankruptcy (and oftentimes do anyway), that simply keep sponsors’ equity option alive. This is the opportunity to significantly improve an equity option that’s already alive.

For this Apex exchange, those who orchestrated the transaction — including the advisors to the company, Kirkland & Ellis and PJT Partners — took the calculation that many of the CLOs in the investor base would ultimately cave.

And 9fin sources suggest that is just what happened once they ran the numbers on how much it would cost to fight, versus accepting the steep haircut (a blended package worth 20 to 30 points less than what the ad hoc group is getting, according to where the market was valuing the loans). It didn’t help that the credit docs did not have many protections and that the deal also came with new money.

For all the sponsors who are trying to avoid crystallizing a paltry IRR by selling today, or even those who did deals between 2019 and 2022 at high multiples and low interest rates — Apex could now be a model for using a pre-distressed LME to generate better future returns.

People moves

If you have any recent moves to announce, please send to one of our team’s emails below to include in this section.

Scott Graves, a partner and co-head of Ares Management private equity business, has left the asset manager as Ares moved its special opportunities strategy to the credit group. Kevin Starke has left Owl Creek to join Wexford Capital. Dylan Ross, who spent 16 years at Brigade Capital Management, is leading TCW’s expansion into the private asset-backed finance business.

The Default Notice is produced by 9fin’s distressed and restructuring team: Max Frumes | max.frumes@9fin.com, Rachel Butt | rachel@9fin.com, Max Reyes | max.reyes@9fin.com, and Kartikeya Dar | kartik@9fin.com

This week’s news

Apex Tool Group — In spite of earlier pushback, the Bain-backed company clinched approval from more than 91% of first lien lenders to participate in a proposed exchange offer by a 27 February deadline.

GrafTech — The graphite electrodes producer has hired Evercore to explore options, as the company faces a challenging outlook due to soft demand and pricing pressures.

Incora — Judge Marvin Isgur said he was “very concerned” with potential inconsistencies between testimony from an investment banker and evidence presented during the Incora adversary trial earlier this week. A day later, he described the Integrated Transaction Doctrine as the most important issue in the case.

Enviva — The wood pellet producer is considering a debtor-in-possession financing proposal put forth by an unsecured bondholder group led by Ares. Enviva has a forbearance agreement with creditors until 4 March to continue restructuring talks, confirming 9fin’s earlier report.

Thrasio — The Amazon aggregator filed for bankruptcy following stalled demand growth and liquidity pressure post the pandemic-fueled e-commerce boom. The company is raising DIP financing comprising $90m new money and a roll-up of $270m first lien debt. DIP claims will convert into exit facilities, the balance first lien debt will be equitized, and $2.5bn of preferred equity will be wiped out.

Sonrava Health (fka Western Dental) — The New Mountain-backed company is sounding out investor interest on new funding backed by its accounts receivables balance. But such efforts may be challenged by its own financing provided to typically lower-income patients amid a higher rate environment.

Staples — The Sycamore Partners-backed company’s bonds popped on encouraging Q423 guidance, boosting investor confidence on its refinancing prospects.

SIRVA — The outsourced moving services provider has engaged Kirkland & Ellis and Centerview to explore options as it deals with a heavy debt burden and weak performance. Meanwhile, lenders banded together with Lazard and Paul Hastings.

Charge Enterprises — The electric vehicle charging company inked a restructuring support agreement, which is expected to carry out in the U.S. Bankruptcy Court for the District of Delaware. 9fin earlier reported that Charge is preparing for potential bankruptcy filing amid ongoing disputes with its lenders and former chairman.

Steward Health Care — The troubled hospital operator released details of its six-point plan to steady operations.

CommScope — The struggling telecommunications infrastructure company reported dismal Q4 23 numbers on Thursday. Management indicated that the company is evaluating asset sales and credit agreement covenant flexibility to deal with near-term debt maturities. Equity plunged 37% but bonds quotes remained largely flat. A group of secured lenders reportedly signed a co-op agreement in February.

Careismatic Brands — The bankruptcy court this week passed a final order authorizing the $125m DIP financing after the company resolved certain objections by the committee of unsecured creditors. Careismatic, which makes medical scrubs, had filed for Chapter 11 in New Jersey after a post-pandemic slowdown hurt demand.

Gol — This week, the bankruptcy court passed a final order authorizing DIP financing of up to $1bn after the company allowed objecting lenders to provide an incremental $50m over the $950m initially proposed. The Brazilian low-cost airline had filed for a freefall bankruptcy in the Southern District of New York.

SunPower — One of the many struggling residential solar power companies recently reported Q4 23 earningsand disclosed a reprieve in the form of debt financing from its majority shareholder. This week, SunPower’s CEO stepped down and the company reported a delay in filing its 10-K for 2023.

Trends

Companies saddled with too much debt, including the likes of Radiology Partners and Equinox, are increasingly turning to preferred equity to get more breathing room. "There has been a lot of calls for [preferred equity injections] going on for nine months,” said Ray Costa, a managing director at Benefit Street Partners, in an interview with 9fin. “We've seen an increase across the board of people willing to look for that type of solution if there's a story for the equity."

Other active distressed and restructuring coverage

AccentCare — The Advent International-backed home health company was reported to have completed a coercive debt exchange that provided $175m of new money and pushed out maturities. We reported earlier on the proposed terms of this transaction, on which Evercore had been advising the company and Gibson Dunn and Centerview Partners a group of lenders.

Allen Media — The media company designated several subsidiaries — holding equipment that is claimed by the company to have zero market value — as unrestricted.

Astound Broadband — The company hired advisors to engage with lenders on inbound liability management proposals.

Belk — Lenders to the department store chain have been speaking with the company about a restructuring that could result in an exchange of much of its debt into equity.

Cano Health — The de-SPACed healthcare services provider finally filed for bankruptcy with a restructuring support agreement from holders of around 86% of its secured debt and 92% of the senior notes.

Carestream — Lenders organized ahead of the dental company’s debt wall.

DISH — The telecom company is sounding out interest from third party investors on financing proposals, after nixing two proposed exchange offers. This is heightening tension in the situation, as existing creditors have already been roiled by the company’s aggressive financing maneuvers.

Equinox — The luxury fitness company extended the maturity of its revolver — which was due 29 February.

Hawaiian Electric — Liability for the Maui wildfires is far from crystallized, as management mentioned on its Q4 23 earnings call that the company is in the early stages of 101 lawsuits as a defendant and insurers have made around 150 subrogation claims against the company.

Hearthside Food Solutions — A group of lenders signed a cooperation agreement to bind themselves in looming debt talks with the US food maker.

Jo-Ann Stores — The arts and crafts retailer’s talks with existing lenders on additional funds may become challenging because of restrictions in its ABL agreement.

Loparex — A group of second lien lenders to the coated paper and films manufacturer organized.

Lumen — The telecom company’s proposed restructuring with an improved transaction support agreementwould address the bulk of 2025 maturities, largely extend maturities of debt at Lumen and Level 3 through at least 2029, and help shore up liquidity.

Magenta Buyer — A group of lenders to Magenta Buyer (dba McAfee) is working with advisors as the cyber security software provider struggles with liquidity and business performance problems.

Office Properties Income Trust — The office REIT continues to evaluate raising debt against its over $3bn of unencumbered assets.

Radiology Partners — The radiology practice announced transactions to address near-term maturities.

Red Lobster — The seafood chain is working with a host of restructuring advisors to help address its leases and improve operations.

Rubio’s Restaurants — The restaurant chain, known for its fish tacos, has kicked off a sale process as its lenders are seeking an exit. Rubio’s is working with Hilco to sell its assets and deal with unprofitable leases, and Carl Marks to help turnaround its operations.

SI Group — A majority group of term loan lenders to the SK Capital-backed chemical additives manufacturer formed an exclusionary co-op agreement.

Signature Bank — Distressed investors have been buying up debt issued by banking crisis casualty Signature Bank, with some managing to turn a profit on the trade.

The Children’s Place — Shareholders cheered when Mithaq Capital, a Saudia Arabia-based investment vehicle with ties to the one of the largest Islamic banks in the world, and Snowball Compounding Ltd disclosed that they have built a 54% stake in the struggling retailer. The company subsequently revealed the execution of a non-binding term sheet for a $130m term loan from Gordon Brothers.

United Site Services — Certain lenders to United Site Services have banded together, as the portable toilet rental company battles weaker earnings amid an inflationary and higher rate environment

Veritas Technology — Creditors are puzzled by the status of their debt holdings after the Carlyle-backed company announced a deal where data safety company Cohesity would buy and merge with Veritas’ data protection business.

Workhorse — The electric vehicle company is working with Stifel to help raise bridge financing as it combats cash flow pressures.

Xplore — Advisors to Xplore and a group of lenders are discussing options to recapitalize the business.

Weekly declines 23 February - 1 March:

Top bond movers (link to full screener on 9fin)

Top loan movers (link to full screener on 9fin)

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