Restructuring activity among companies in the Morningstar LSTA US Leveraged Loan Index in July included a bankruptcy filing and two liability management exercises, keeping default rates steady for the month.
As of July 31, the trailing 12-month default rates of the Morningstar LSTA US Leveraged Loan Index were as follows:
- Payment default rate by amount: 1.11%
- Payment default rate by issuer count: 1.25%
- Dual-track default rate by issuer count: 4.56%
LCD’s monthly default report features the legacy payment default rate and a dual-track default rate by count that includes index issuers conducting distressed liability management exercises (LMEs). More details and the methodology can be found here.
For conventional payment defaults (excluding distressed LMEs), Rodan & Fields rolled off the trailing 12-month calculation, while LifeScan Inc. joined, leaving the default rates by amount and count at 1.11% and 1.25%, respectively, flat with June’s readings.
At the post-pandemic high, the default rate reached peaks of 1.75% by amount in July 2023 and 2.07% by issuer count in February 2024.
When including distressed LMEs that prompted a downgrade to ‘D’ or ‘SD’ last month, the combined rate with payment defaults climbed to 4.56% by issuer count in July, up from 4.46% in June and 4.36% in May.
The recent high for the combined rate is 4.70% in December 2024.
Looking specifically at LMEs, the trailing 12-month count of issuers in the Morningstar LSTA US Leveraged Loan Index conducting these transactions ticked slightly higher to 37 in July, from 36 in June and 35 in May.
In June 2022, as the Fed embarked on its rate-hiking cycle, the trailing 12-month count for LMEs was just five.
As the above chart shows, liability management exercises and distressed exchanges have outpaced payment defaults and bankruptcies in every month since January 2024, deviating from the historical norm for balance sheet management by distressed loan issuers.
In terms of share of the restructuring landscape, for the 12 months ended July 31, LMEs made up 73% of the count, matching the all-time high set in February.
Liability management
Looking more closely at July’s default activity, after missing interest and principal payments on its third-lien term loan in October, LifeScan Inc., a producer of blood glucose management products, filed for Chapter 11 protection on July 15 in Houston bankruptcy court.
According to the first-day declaration filed in the case filed by Valerie Asbury, the company’s president and CEO, LifeScan’s financial position had deteriorated in the past few years due to “changes in the diabetes management market, predominantly driven by the growing adoption of [continuous glucose monitoring without finger pricking] products.”
Asbury further said that the company’s financial challenges have also been exacerbated by burdensome contracts (rebate agreements) with US pharmacy benefit managers (PBMs), state Medicaid entities and other managed care organizations.
As part of its pre-negotiated agreement, the company will enact a restructuring through an equitization or a sale to either consenting lenders serving as the “stalking horse” bidder or other third-party purchasers. Under the restructuring plan, LifeScan would reduce its outstanding debt by more than 75% through an exchange of its first- and second-lien debt for equity and/or new first-lien debt and excess cash at emergence on the plan’s effective date.
High-speed internet and TV provider Radiate, doing business as Astound Broadband, was downgraded to D at S&P Global Ratings on July 3 following a series of exchange transactions to restructure its first-lien and unsecured debt.
Specifically, the company exchanged $3.31 billion of its first-lien term loan due 2026 (a constituent of the loan index), $900 million of first-lien notes and $391 million of revolver debt ($4.6 billion in total) for $4.52 billion of new first-lien, first-out debt that is structurally subordinate (in lien and payment priority) to a new $300 million super senior basket available for future debt raises. Furthermore, $1 billion of unsecured notes were exchanged for $830 million of first-lien, second-out notes and $182 million of a first-lien sponsor term loan was exchanged for $109 million of a first-lien, second-out term loan and $73 million of a first-lien, third-out term loan.
Radiate was acquired by Stonepeak for $8.1 billion in 2020.
Finally, Cubic was on July 31 downgraded to SD, from CC, by S&P Global Ratings after the issuer embarked upon a recapitalization transaction that was deemed a distressed debt restructuring by the ratings agency.
Among other things, the payment and intelligence travel systems provider swapped its term loan B and term loan C facilities for second-out priority loans. According to S&P, term loan C lenders exchanged their loans at 70 cents on the dollar with reduced cash interest and agreed to release a portion of cash collateral without a corresponding debt paydown that was required under the original credit agreement.
As a result of the restructuring, Cubic’s debt maturities were extended to May 2029, with lenders subordinated and with all restrictive covenants removed.
The company’s $1.475 billion term loan B and $300 million term loan C were syndicated in 2021 to back the company’s buyout by Veritas Capital and Evergreen Coast Capital. Per S&P, the company has faced several challenges, including supply chain issues, contract award delays, contract renegotiations and restructuring costs, which have hampered its performance and added to pressure stemming from its debt burden.
Repeat defaults
With LifeScan filing for bankruptcy, the percentage of companies that conducted an LME in 2023 only to later default on payments or declare bankruptcy rose to 24% in July, from the prior level of 19%.
LCD’s data also shows that of the companies that conducted an LME during the pandemic default wave of 2020, more than a quarter returned with a conventional default of missed interest payments or a bankruptcy filing within the next three years. For 2022, that share is at 44%.
By sector
Zooming in again on LMEs for the last 12 months, a sector breakdown shows Software continues to dominate restructurings in the index, making up 19% of LME activity. This is followed by Media at 11%, and Chemicals at 8%.
Finally, forward-looking measures improved with respect to potential distress activity. Most notably, the ratio of downgrades of loan facilities versus upgrades fell to 2.33x in July, from 3.08x in June, which experienced a significant uptick, with the measure jumping by the most since May 2020. This three-month rolling calculation remains well below a recent peak of 4.69x in February, which marked the highest level for this metric since July 2020.
As for price-based measures, the distress ratio of loans priced below 80 cents on the dollar eased for a fourth consecutive month in July, to 2.83%, which marks a three-year low. By comparison, the share of loans in distress hit a post-pandemic high of 7.36% in December 2022, ahead of an interest rate-driven uptick in defaults in 2023.
Featured image: cagkansayin/Getty Images
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