In the four months since 9fin published the first version of our post-LME investments story, several US companies have closed deals with new superpriority structures, whose sponsors all hope they’ve engineered the next Yak Access (yes some LMEs work!).

Since then, an increasing number of debt tranches created from LMEs are flashing warning signs of distress. A 9fin review of thirty companies that carried out such transactions over the past two years shows that senior credit facilities from these transactions are trading at steep discounts. At least nine first lien, first-out loans are priced below 85 cents. That count jumps to 20 if we include junior tranches.

“For some of these companies, the businesses themselves are still struggling,” said Shai Schmidt, a partner at Glenn Agre who focuses on restructuring. “An LME can give the company liquidity, extend maturities and capture discount, but it does not fix the underlying business issues.”

Investors have been eyeing opportunities in secondary purchases of post-LME credits, taking advantage of discounts to gain access to structures with tighter documentation while betting on future recoveries. In some cases, however, trading levels may indicate another debt restructuring in the works.

A similar trend story found that 30% of the companies wound up restructuring within four years of the initial LME, as such transactions typically provided temporary relief instead of resolving balance sheet issues.

For example, SI Group and United Site Services — both of which completed LME’s in 2024 — are facing liquidity pressures and have seen their debt slip further into distressed territory since the start of the year, prompting the lenders in the 2024 LME to take certain actions that often precede a restructuring.

Last September, SI Group secured $100m in new funding from its private equity sponsor, SK Capital Partners, allowing the company to extend debt maturities. Yet, creditors have already started working with advisers amid growing concerns over the chemical additives company’s liquidity needs.

Similarly, in just a year after Platinum Equity’s United Site Services completed a double-dip transaction, the portable toilet company recently rehired restructuring advisors, with lenders preparing for potential negotiations after earnings fell short of expectations.

SI Group, United Site Services and Platinum Equity did not respond to request for comment.

Even companies that have cleaned up their books and improved liquidity are also showing similar signs of distress as industry-wide policies or regulations cloud future demand for their products.

Since Unifrax completed a distressed exchange about a year ago, the company’s new 11.175% issue has traded down to 93 cents as of 21 August. The decline followed President Trump’s January executive order to eliminate policies favoring electric vehicles, casting a shadow over the Clearlake-backed specialty chemical manufacturer, whose core products enhance EV battery performance.

The bonds have struggled as much of the company’s growth was expected to come from the electric vehicle sector. The rollback of mandates and tax incentives could make that path more challenging, though an advisor tracking the situation believes the company has “adequate” liquidity.

Although Unifrax indeed benefitted from cost containment programs in the first half of 2024, rating agency Fitch expects a continuation of last year’s market weakness to weigh on the company’s operating performance, limiting any volume or price improvement for the rest of this year.

Standout post-LME credits

In spite of the rising distress in certain post-LME structures, some companies stand out as brighter spots for credit investors for various reasons, including tighter credit agreements and improvement of the underlying business.

“Credit agreements negotiated as part of an LME typically include additional lender protections that may make it harder for the company to do another LME, such as general LME blockers, as well as double-dip, Envision, Incora and other specific blockers,” Schmidt said.

Quest Software, for one, has no open markets purchase exemptions in its credit documents post-new money deal and the company is already cash flow positive, according to a source.

Since Quest closed its transaction in May — and did a little clean up with a 3.5-lien exchange for holdouts this month — credit investors focused on post-LME structures have been particularly bullish on the company’s second-priority debt, according to a buysider.

Quotes on the second-out facility stood at 83 cents on the dollar on 21 August, compared to the $350m first-priority loan that’s trading above par and the third-out portion quoted at 57.4 cents. Quest’s private equity sponsor Clearlake declined to comment for this story.

Rackspace is also having a good run with its revenue slump projected to soon hit an inflection point, which has yet to reflect on its debt trading levels. Based on the company’s third-quarter guidance, it’s expected to generate more than $83m in free cash flow this year, an amount that could allow the cloud-software firm to break even, according to an analyst note.

As of the second quarter, Rackspace had $414m in liquidity, which includes $104m of cash. Its post-LME $1.6bn term loan maturing in May 2028 is trading in the 50s, while its second-out bonds are quoted in the high 40s.

“We want companies that generate strong, sustainable unlevered free cash flow, even if current levered free cash flow is negative due to the buyout and, more recently, the LME," said Grant Mitchell, Head of research at Axar Capital Management, an opportunistic credit investment firm with a focus on the US middle market.

In some cases, it could take a trip to the bankruptcy court to turn things around.

LifeScan’s first lien loan last traded at 64.5 cents, up from the low of 24.25 cents in November 2024, after the company missed a payment on its loan and entered into a forbearance. The blood glucose monitoring device maker is now on the verge of implementing major debt-cutting and cash-saving measures through the bankruptcy court in ways that could benefit lenders.

Court documents revealed that LifeScan will free up its balance sheet by rejecting contracts that have been a burden to the company, while its private equity sponsor Platinum will hand over up to 95% equity to lenders, as reported. If approved, these measures could potentially leave LifeScan with plenty of cash to pay down outstanding debt while continuing its push into the continuous glucose monitoring space.

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