Sabine, Walter Energy In Spotlight On LCD's Restructuring Watchlist

Depressed prices for oil and coal triggered two loan issuer defaults last week, Sabine Oil & Gas and Walter Energy.

Those developments were the most significant for LCD’s Restructuring Watchlist, which tracks companies with recent credit defaults or downgrades into junk territory, issuers with debt trading at deeply distressed levels, as well as those that have recently hired restructuring advisers or entered into creditor negotiations.

U.S. Shale Solutions, which provides maintenance and construction services to the oil and gas industry, was affected by the same negative forces. On April 20, S&P downgraded the corporate credit rating to CCC and the secured notes, issued in August, to CCC+. The outlook on U.S. Shale Solutions is negative, with the ratings agency citing a potential near-term liquidity crisis and covenant violation.

Coal miner Walter Energy’s problems have been building. In August, the company’s credit rating was lowered to SD, or selective default, due to a distressed exchange with a holder of $25 million of 9.87% bonds due 2020 for common stock. In September, remaining bonds subsequently dropped on a poor outlook for the sector, a continuing shift in U.S. power production to natural gas from coal, and low prices.

Here is the full Watchlist, which is updated weekly by LCD (Watchlist is compiled by Matthew Fuller):

Walter Energy produces and exports coal from mines from U.S., Canadian, and British operations in Alabama and West Virginia; Northeast British Columbia; and South Wales. Demand for coal has deteriorated due to excess supply and declining demand for steel from China, which is the world’ largest consumer of coal.

Walter Energy skipped two interest payments due to holders of both 9.5% first-lien notes due 2019 and 8.5% unsecured notes due 2020. Management said that the company has $435 million of cash on hand, so the withholding of the $46.1 million and $19.1 million owed to bondholders was not due to a liquidity crisis. Rather, the company is negotiating with lenders to set up a an appropriate capital structure to face the challenging market conditions.

Both Walter Energy and Sabine Oil & Gas were part of the S&P/LSTA Leveraged Loan Index. The index has seen three issuers default this year, including Caesars Entertainment Operating Company, the operator of Caesars Palace in Las Vegas, which filed for bankruptcy in January.

In other news last week, online instruction and testing company Edmentum bought itself more time. The company, controlled by Thoma Bravo, unveiled a recapitalization on April 20 under which second-lien lenders will take ownership of the company. The Bloomington, Minn.-based company will repay $231 million of first-lien debt and “substantially” reduce its $140 million of second-lien debt. Second-lien lenders will provide a $35 million capital injection allowing Edmentum to pursue growth opportunities.

Similarly, Halcón Resources will be able to better weather the slump in oil prices due to the sale of $700 million offering of second-lien notes on April 21. The distressed exploration and production company operating in North Dakota and eastern Texas intends to use proceeds from the offering to repay a portion of the outstanding borrowings under a revolving credit facility and to fund general corporate purposes.

On a positive note, S&P revised the outlook of distressed retailer J.C. Penney to positive from stable on April 22, citing improvement in same-store sales, margins, and earnings, due to an ongoing turnaround plan.

Prospects also brightened for another distressed retailer, Gymboree. The company advanced after results on April 23 showed gains in sales, margins, and earnings. The 9.125% notes due 2018, the sole bond issue, traded up eight points, in blocks at 56.5, versus 48/49 before the news, and term debt due 2018 (L+350, 1.5% LIBOR floor) gained about two points, to an 80/81 market, sources said.

The San Francisco-based company operates child-parent-development play and music programs at franchised and company-operated centers, mostly in the U.S. and Canada, and sells children's and baby clothing and products online under www.gymboree.com, www.janieandjack.com and www.crazy8.com. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.