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SPECIAL COMMENT
CORPORATES MARCH 16, 2015
Table of Contents:
RISK APPETITE HAS INCREASED AS COVENANT PROTECTIONS HAVE DECLINED 2 QUALITY HOME BRANDS: UNUSUALLY WEAK INDUSTRY DEMAND TRENDS 5 HUDSON PRODUCTS: EXCESS INDUSTRY CAPACITY 5 MERRILL CORPORATION: NEAR-TERM DEBT MATURITY WALL 6 UNITEK GLOBAL: REVENUE RECOGNITION ISSUES AND FREQUENT MANAGEMENT CHANGES 6 STANADYNE: NEGATIVE PERFORMANCE TRENDS IN A POSITIVE INDUSTRY ENVIRONMENT 6 RURAL METRO: CASH COLLECTION CHALLENGES AND CAPEX DEFERRAL 7 ALLEN SYSTEMS: DECLINING SALES IN LEGACY PRODUCTS 7 EDUCATION MANAGEMENT LLC: WEAK INDUSTRY FUNDAMENTALS 8 MOODY’S RELATED RESEARCH 11
Analyst Contacts:
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Alexandra S. Parker +1.212.553.4889 Managing Director- Corporate Finance [email protected]
Patricio Healy +1.212.553.1898 Associate Analyst [email protected]
Tom Marshella +1.212.553.4668 Managing Director - US and America Corporate Finance [email protected]
US Leveraged Finance Warning Signs: As Covenants Vanish, Past Defaults Offer Lessons for the Future
We identify several key credit characteristics exhibited by smaller, speculative-grade companies prior to default. We randomly selected a sample of 10 small, speculative-grade companies that either defaulted or that nearly missed default, from December 2009 through January 2015, to illustrate 10 predictors that surfaced at one or more of these companies in advance of default. These include excessive leverage, weak liquidity, weak operating performance, declining sales and weak industry fundamentals. (For a list of the companies and their credit issues, see page 3.)
Although non-exhaustive, our list provides early warning signs of a potential default at a time when speculative-grade issuers are cutting back sharply on covenant protections. As covenants disappear from loan agreements, there are fewer early warning signs of a potential payment default when a company becomes troubled. The lack of covenants is not a near-term concern. While market volatility has increased, we expect the US speculative-grade default rate to remain low by historical standards over the next 12 months. But when conditions eventually turn, credit problems could quickly escalate, especially at lower-rated, smaller, speculative-grade companies like the ones we examined for this report.
Weak credit metrics, poor operating performance and weak liquidity were the most common warning signs within the sample group. Seven out of the 10 companies had very high leverage (8x or higher) and weak interest coverage and seven exhibited weak operating performance. Six generated negative free cash flow at least three to 15 months prior to default. Interestingly, only one company had negative EBITDA margins and only one cut back significantly on maintenance capital expenditures. One company experienced negative trends in operating performance in a positive industry environment, a strong sign of potential problems down the road.
Not all traditional risk gauges light up when something goes wrong. Four companies demonstrated adequate liquidity 12 to 15 months in advance of default, though the majority had weak liquidity. The sample group also showed that maintenance covenants – which typically trigger technical defaults in loan agreements when breached – are not always reliable indicators of credit problems. Out of the eight companies that had maintenance covenants, three did not experience covenant compliance issues prior to default.
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SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
CORPORATES
Risk appetite has increased as covenant protections have declined
Over the past two years, US investors have been on the hunt for yield as interest rates have hovered at historic lows and credit risk has remained benign. These conditions have paved the way for speculative-grade companies (rated Ba1 or lower at issuance) to access ample liquidity in the capital markets. The robust intrinsic liquidity of these companies, (see Appendix A, page 9, for our Liquidity Stress Index) has been one of the key drivers behind the low US default rate, which stood at 1.9% in December 2014 and which we forecast will rise to a still-low 2.8% in December 2015. These accommodative conditions have enabled companies to cut back sharply on covenant protections. According to Thomson Reuters, covenant-lite loans in 2014 represented roughly 70% of total institutional issuance, up from 25% in 2012 and just 3% in 2010.
During the recent recession, cov-lite debt allowed many companies to postpone default and address problems that were based largely on liquidity pressures. In our June 2014 report, Time is Catching Up with Cov-Lite, we found that bubble-era covenant-lite issuers defaulted at a rate somewhat below historical averages for speculative-grade issuers. We also found that this appears to be changing. The cov-lite defaults by US non-investment grade companies examined for the report had a default rate somewhat higher than the average for US non-investment grade companies between 2005 and the first quarter of 2014. Cov-lite loans can help healthy companies faced with liquidity pressures (for example, a cyclical company caught in a downturn) defer default, but they don’t allow companies with more fundamental operating challenges or excessive leverage to escape it.
The absence of covenants in covenant-lite loans (defined here as having no ratio-based tests or only a springing ratio based test) means there are fewer early warning signs of a potential payment default when a company starts running into trouble. Financial maintenance covenants, which typically require a borrower to meet certain financial performance criteria on a quarterly basis, typically trigger technical defaults in loan agreements when breached. While the absence of such covenants are less of a concern when market risk is relatively benign, credit problems can quickly escalate when markets suddenly turn – especially for low-rated smaller speculative-grade companies, which can be particularly vulnerable when market liquidity declines.
Against this backdrop, we randomly selected nine speculative-grade companies that defaulted and one that nearly missed default from December 2009 through January 2015 to illustrate the early warnings signs of a potential default. All of the companies were relatively small; eight had revenues of less than $800 million, while the largest two had revenues between $1 billion and $2.5 billion. (See Exhibit 1, page 3, for the list.) Defaults include Chapter 11 filings, distressed exchanges and missed interest/principal payments. Our definition of default captures all missed or delayed interest or principal payments, even if an amendment has been successfully executed. (See Appendix B, page 10, for a more comprehensive definition of default.)
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
3 MARCH 16, 2015
SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
CORPORATES
EXHIBIT 1
10 Spec-Grade Defaults or Near-Defaults (Dec. 2009-Jan. 2015)
Issuer Date of default
Public filer Cov-lite
PE owned (at time
of default) Type of default
Sr. Unsec. rating or equivalent 12
mos. prior to default
Sr. Unsec. rating or equivalent at
default
Maintenance covenant
compliance issues
Quality Home Brands, LLC 12/4/2009 x Prepackaged Chapter 11
Caa1 Caa2 x
Reddy Ice Holdings, Inc. 4/12/2012 x Prepackaged Chapter 11
Caa1 Ca
Hudson Products Holdings, Inc. 6/2/2012 x Distressed exchange
Caa1 Caa2 x
Merrill Corporation 6/29/2012 Missed principal payment
Caa2 Ca x
UniTek Global Services, Inc. 6/3/2013 x Missed interest payment
B3 Caa3
Stanadyne Holdings, Inc. Near miss June 2013
x x x Near miss June 2013
Caa2 Caa3
Rural/Metro Corporation 8/4/2013 x Chapter 11 Caa2 C
James River Coal Company 4/7/2014 x x Chapter 11 Caa2 Caa3
Allen Systems Group, Inc. 4/28/2014 Missed interest payment
Ca C x
Education Management LLC 1/5/2015 x x Distressed exchange
Caa2 Ca x
While our sample size is relatively small, the issues that these companies experienced in the run-up to default are common at companies with deteriorating credit profiles. Of course, our list of early warning signs (see Exhibit 2, next page) is hardly exhaustive. Other signals of credit deterioration and heightened default risk could include no guidance from management on how and when operating performance will improve; increasingly aggressive EBITDA add-backs; equity infusions to shore up liquidity; previous restructurings at very high interest rates; funded debt that exceeds equity value; and accounting issues. But each company on our list flashed warning signs that, on a look-back basis, turned out to be key signals that default was highly likely. In all cases, estimated senior unsecured ratings were Caa2 or below at default, and with one exception, Caa1 or below 12 months prior to default.
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SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
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EXHIBIT 2
Early Warning Signs of Potential Default
Companies
Excessive leverage & weak interest
coverage
Weak operating
performance Weak
liquidity Declining
sales
Weak industry funda-
mentals
High manage-
ment turnover
Multiple discounted
debt repurchases
Significant maintenance
CAPEX deferral
Cash collection problems
Negative performance
trends in positive
environment
Quality Home Brands x x x x x
Reddy Ice Holdings x x
x
Hudson Products x x
x
Merrill Corporation
x
x
UniTek Global Services
x
Stanadyne Holdings x
x
x
Rural/Metro Corporation x x x x x x x
James River Coal x x
x x x
Allen Systems Group x x x x
Education Management
x x x x
Some key findings:
» Seven out of the 10 companies had very high leverage (in excess of 8x) and weak interest coverage.
» Seven exhibited weak operating performance (declining EBITDA margins), with six generating negative free cash flow at least three to 15 months prior to default.
» Only one company had negative EBITDA margins and only one cut back significantly on maintenance capital expenditures.
» In one unusual case, a company experienced negative trends in operating performance in a positive industry environment, a strong signal of potential problems down the road.
» Not all traditional risk gauges light up when something goes wrong. Four companies demonstrated adequate liquidity (our second lowest speculative grade liquidity score) 12 to 15 months in advance of default, though the majority had weak liquidity (our lowest score – see Appendix A for our Liquidity Stress Index).
» Maintenance covenants are not necessarily reliable indicators of credit quality. Out of the eight companies in our sample that had maintenance covenants, three did not experience covenant compliance issues prior to default.
Beginning on the next page, we provide a summary of each company’s pre-default situation and the warning signs that default was highly likely. Although hindsight is 20-20, we believe the list provides a useful illustration of predictors of possible future defaults.
5 MARCH 16, 2015
SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
CORPORATES
Quality Home Brands: Unusually weak industry demand trends
Operating margins at Quality Home Brands Holdings LLC (Caa1 stable) began declining in 2008 due to the weak US housing market and depressed consumer discretionary spending. The company suffered a sharp deterioration in liquidity and faced near-term covenant violations under its secured credit facilities. It had a small cash balance and an undrawn secured revolving credit facility (due in 2012), but we believed the possibility of covenant violations could restrict access to the revolver. In the fall of 2008, the company amended its senior credit facility to increase significantly its covenant cushion and also received an equity infusion from its financial sponsors. But the housing market and consumer discretionary spending continued to weaken with no end in sight. The company was subsequently unable to secure additional amendments and/or equity infusions and filed a pre-packaged bankruptcy in December 2009.
Reddy Ice: Protracted weak operating performance in a single product
Reddy Ice Holdings Inc.'s (ratings withdrawn) operating performance began to deteriorate during the last recession because of soft consumer spending and weak housing and construction activity. The company’s strong market position was not sufficient to counteract a business model that relied heavily on a single product, packaged ice. The negative performance trend continued right up until the company’s voluntary pre-packaged bankruptcy filing in April 2012. The uncertain macro environment and competition in the US packaged ice industry caused Reddy Ice to underperform management’s expectations during multiple consecutive quarters, an indication that things were not improving. An industry-wide antitrust investigation also put significant pressure on cash balances and increased the cost of refinancing a secured term loan with five-year senior notes in 2010. The refinancing extended Reddy Ice’s debt maturity profile, increased its cash balances and improved flexibility under its financial covenants, but did not prevent a default. Declining EBITDA caused financial leverage as measured by debt/EBITDA to rise to unsustainable levels. The company’s cash balances, which had been meaningful, declined significantly, and availability under its revolving credit facility shrank as its dependence on this facility grew. Very poor near-term visibility into business trends contributed to the uncertainty around future operating performance. The 2012 pre-packaged bankruptcy filing allowed the company, as one of its restructuring alternatives, to seek to purchase one of its competitors, which at the time was up for sale under a court-supervised auction.
Hudson Products: Excess industry capacity
Hudson Products Holdings’ (B2 stable) operating performance began to suffer in 2009 from reduced capital spending by North American refineries and petrochemical plants. A debt restructuring in mid-2010 that expanded the company’s revolver capacity and provided a two-year financial maintenance covenant holiday, along with a payment in kind (PIK) option on mezzanine notes, failed to allow the company to weather the effects of the Great Recession and avoid a distressed exchange. The cyclical downturn in the industry was longer and deeper than anticipated. Despite an increase in bookings and backlog beginning in mid-2011, realized margins remained low in 2011 as projects booked at lower margins in 2010 were converted to revenue. These factors limited the company’s ability to meaningfully reduce its high financial leverage prior to the expiration of the covenant holiday. We believed there was a high probability of a covenant breach without an equity cure from Hudson’s sponsor and/or additional amendments from its lenders. In mid-2012, the company exchanged sponsor-held subordinated debt for preferred stock, which we deemed to be a distressed exchange (limited default).
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SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
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Merrill Corporation: Near-term debt maturity wall
In the years leading up to its March 2013 out-of-court restructuring, Merrill Corporation (ratings withdrawn) had implemented a series of debt repurchases at deep discounts, which we deemed to be distressed exchanges (limited defaults). Despite these attempts to reduce its funded debt, over 65% of the company’s liability structure (a first lien revolver and term loan) was due in 2012. In mid-2012, Merrill entered into a credit agreement amendment that extended the maturity of its revolver by several weeks, which we viewed as a limited default. The credit agreement amendment increased the company’s interest expense. Merrill had already re-scaled its cost base, leaving little room for further free cash flow improvement through operational restructuring. While the company was able to make operational adjustments to restore about half of its recession-era decline in EBITDA, which improved its credit metrics, the combination of a thin free cash flow cushion and retrenchment in the capital markets at a time when Merrill needed to refinance imminent debt maturities, ultimately led to an out-of-court restructuring.
UniTek Global: Revenue recognition issues and frequent management changes
Unitek Global Services (ratings withdrawn) announced in April 2013 that it had revenue recognition issues at its Pinnacle Wireless division. The company’s previously issued consolidated financial statements dating back to the interim period ended October 1, 2011 could no longer be relied upon, including with regard to the effectiveness of internal controls over financial reporting. UniTek also disclosed that certain Pinnacle employees engaged in fraudulent activities that resulted in improper revenue recognition. It also disclosed that in connection with the company’s Audit Committee investigation, certain UniTek employees, including the former CFO, controller and president of the Pinnacle Wireless Division, were terminated (the previous CEO and chairman had resigned in January 2012).
The company experienced deterioration in liquidity following the announcement and operated under a forbearance agreement with its lenders. Subsequently, UniTek's subsidiary, DirectSat USA, LLC, received a letter from a key customer, DIRECTV, LLC, providing 180-day notice of the termination of its master services agreement with DirectSat, effective November 8, 2013. UniTek defaulted in June 2013 when it failed to make an interest payment on its term loan within the required grace period under its credit agreement.
Stanadyne: Negative performance trends in a positive industry environment
Stanadyne Holdings Inc. (ratings withdrawn) is a small automotive supplier focusing on diesel fuel injection systems used in engines for off-highway applications. The company is an example of high default risk but no ultimate default (a ‘near miss’) because its debt was bought out with proceeds from an asset sale. Stanadyne’s product breadth was narrow relative to other auto suppliers. The company was hurt by a substantial operational restructuring in 2010/2011 that did not go as expected. A subsequent deterioration in earnings led to a substantial increase in financial leverage (as high as 15 times for the 12 months ended September 30, 2011, including debt at both the operating company and the holdco). The company benefited from improving vehicle build rates in 2012, but a setback in operating performance in early 2013 caused leverage to remain substantially above the low-to-mid single digits achieved prior to the Great Recession. Stanadyne had been consuming cash since 2009 and a substantial interest burden limited near-term prospects for positive free cash flow. Meanwhile, other automotive suppliers had started to show improved performance as vehicle build rates recovered. Without the sale of its filtration business (announced in May 2014) and use of its proceeds for debt retirement, we believe the refinancing process would have been very difficult, with adjusted financial leverage through the holding company still in excess of 10 times debt/EBITDA.
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SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
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Rural/Metro: Cash collection challenges and capex deferral
Rural/Metro Corp. (ratings withdrawn), a provider of emergency and non-emergency medical transportation, protection and other healthcare-related services, suffered from declines in revenue and accounts receivable conversion rates. For the nine months ended March 31, 2013, revenue conversion declined to $0.33 per $1 as compared to $0.40 for the same period in 2012. This decline reflected increased contractual allowances and uncompensated care related to cash collection and revenue recognition challenges, a shift in payer mix, and growing pressures from self-pay accounts (patients who are uninsured or do not have the ability to pay for services). The company also made several changes in its accounts receivable reserves that also led to a drop in net revenue. Rural/Metro’s decision to defer non-essential capital expenditures (another red flag) did not help to improve its weak liquidity position (minimal cash balances and break-even free cash flow) and the company filed for bankruptcy in August 2013. Notably, the company had named a new CEO and CFO to implement a new revenue recognition system as well as certain cost savings initiatives.
James River Coal: Multiple discounted debt repurchases
James River Coal Co. (ratings withdrawn) has significant operations in Central Appalachia, the most challenged US coal basin. The company’s thermal coal business in the region had been suffering from both rising cash costs and declining demand as power generation shifted toward natural gas. The company attempted to diversify its operations through a debt-funded acquisition of metallurgical coal producer International Resource Partners in early 2011, at the peak of met coal pricing. A significant drop in met coal prices weakened credit measures considerably. The company pursued operational restructurings, including closing some of its mines, in an attempt to shore up its operating performance. It also completed multiple discounted debt repurchases, which we deemed to be limited defaults, in order to reduce balance sheet debt. Ultimately, these steps could not stop the company’s cash burn and deteriorating liquidity position. James River filed for Chapter 11 protection in April 2014.
Allen Systems: Declining sales in legacy products
Allen Systems Group (ratings withdrawn) experienced decreasing organic revenue in its mature, legacy information technology asset management software business. In 2011 and 2012, organic revenue declines in these products were in the high single digits due to high turnover in the company’s sales force, sales execution issues and declines in total deal values per account executive. The company began a series of debt- and cash-funded acquisitions in 2011 and 2012 in an attempt to replace the core revenue decline from its legacy products. The incremental debt from the acquisitions, combined with delays in achieving planned cost savings, caused leverage (debt/EBITDA) to climb to unsustainable levels. Moreover, the revenue from acquired products failed to outpace the decline in core revenues. The company also experienced challenges in integrating the acquisitions and delays in rolling out acquired products. At the same time, increased consolidation and competition in enterprise systems management software pressured sales. Large players with greater scale and flexibility were able to bundle products and offer holistic solutions with which Allen Systems Group had a hard time competing. Liquidity deteriorated as a result of declining cash flow and very little cash on hand, which eventually caused the company to fully draw its revolving credit facility. Financial maintenance covenants were eventually breached. The company ultimately failed to pay interest on its first lien credit facilities and its second lien notes in April 2014. It filed for bankruptcy protection in February 2015.
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SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
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Education Management LLC: Weak industry fundamentals
The for-profit-post-secondary education industry has been facing a rising level of regulatory and legal pressures for several years, starting with increasingly onerous rule changes from the US Department of Education and exacerbated by lawsuits brought by the US Justice Department and states’ attorneys general against Education Management LLC (ratings withdrawn) and other major operators in the sector. These regulatory and legal developments began to decrease enrollment at Education Management’s institutions (The Art Institute, Argosy University, Brown Mackie Colleges and South University), starting in 2011. At the same time, the company was not able to reduce costs, which had become further burdened by regulatory requirements, at the same rate as revenue declines associated with declining enrollment. Also, negative industry press was raising the specter of greater competition from not-for-profit institutions.
Education Management was facing significant debt maturities and weak covenant headroom under its credit agreements. In March 2013 the company entered a debt exchange with its lenders that improved its debt maturity profile. But overall enrollments continued to worsen, covenant cushion remained tight, and legal challenges created uncertainties. The company ultimately drew down its revolving credit facility to bolster its cash position and engaged financial advisors to assist in efforts to re-align its capital structure. On January 5, 2015, Education Management closed on a debt-for-equity exchange for the majority of its debt.
9 MARCH 16, 2015
SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
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Appendix A: Moody’s Liquidity-Stress Index-Led Default-Rate Turns*
LSI, MCSI, and Spec-Grade Default Rate
Source: Moody’s Investors Service
* The LSI is our proprietary Liquidity-Stress Index, which falls when corporate liquidity appears to improve and rises when it appears to weaken. The index takes the total number of companies rated SGL-4, our lowest liquidity rating on a scale of 1 to 4, and divides it by the total number of SGL-rated companies. So the more SGL-4 rated companies there are, the higher the index. Similarly, Moody’s Covenant Stress Index (MCSI) measures the extent to which speculative-grade, non-financial companies are at risk of violating debt covenants. A higher MCSI reading indicates higher risk of covenant violations. The MCSI indicates the percentage of SGL-rated companies with the lowest covenant component score of 4 on a four-point scale.
0%
5%
10%
15%
20%
25%
Jan-
04Ap
r-04
Jul-0
4O
ct-0
4Ja
n-05
Apr-
05Ju
l-05
Oct
-05
Jan-
06Ap
r-06
Jul-0
6O
ct-0
6Ja
n-07
Apr-
07Ju
l-07
Oct
-07
Jan-
08Ap
r-08
Jul-0
8O
ct-0
8Ja
n-09
Apr-
09Ju
l-09
Oct
-09
Jan-
10Ap
r-10
Jul-1
0O
ct-1
0Ja
n-11
Apr-
11Ju
l-11
Oct
-11
Jan-
12Ap
r-12
Jul-1
2O
ct-1
2Ja
n-13
Apr-
13Ju
l-13
Oct
-13
Jan-
14Ap
r-14
Jul-1
4O
ct-1
4Ja
n-15
Moody's Liquidity Stress Index 1-year US spec-grade default rate Covenant Stress Index
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SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
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Appendix B: Moody’s Definition of Default
Moody’s definition of default includes three types of credit events:
» A missed or delayed disbursement of interest and/or principal;
» Bankruptcy, administration, legal receivership, or other legal blocks (perhaps by regulators) to the timely payment of interest and/or principal; or
» A distressed exchange occurs where: (i) the issuer offers debt holders a new security or package of securities that amount to a diminished financial obligation (such as preferred or common stock, or debt with a lower coupon or par amount, lower seniority, or longer maturity); and (ii) the exchange has the effect of allowing the issuer to avoid a bankruptcy or payment default.
The definition of a default is intended to capture events that change the relationship between debt holders and the debt issuer from the relationship which was originally contracted, and which subjects the bondholder to an economic loss. Technical defaults (covenant violations, etc.) are not included in Moody’s definition of default. Secondary and tertiary defaults are reported only after the initial default event is believed to have been cured. This is to ensure that multiple defaults related to a single episode of credit distress are not over-counted.
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SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
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Moody’s Related Research
Special Comments:
» Leveraged Finance: Market is Less Exuberant But Still Well Supported, February 2015 (179170)
» Leveraged Finance: Issuance to Fall in 2015 Given Challenges, January 2015 (178706)
» Leveraged Finance Market Remains Resilient, December 2014, (177845)
» Leveraged Finance: EBITDA: Used and Abused, November 2014 (173806)
» Loan Covenant Quality Continues to Erode, September 2014 (174754)
» Covenant-Lite Defaults and Recoveries: Time is Catching Up with Covenant-Lite, June 2014 (171570)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.
12 MARCH 16, 2015
SPECIAL COMMENT: US LEVERAGED FINANCE: POTENTIAL WARNING SIGNS: AS COVENANTS VANISH, PAST DEFAULTS OFFER LESSONS FOR THE FUTURE
CORPORATES
Report Number: 178367
Author Alexandra S. Parker
Production Associate Masaki Shiomi
© 2015 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc., have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc., for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for “retail clients” to make any investment decision based on MOODY’S credit rating. If in doubt you should contact your financial or other professional adviser.
For Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
