A rough 2017 for energy and retail sector leveraged loans

Fitch Ratings has released its monthly US Leveraged Loan Default Insight report, providing a unique snapshot into statistics from 2017, much of which reflect the turmoil that retail and energy encountered in the past year.

The trouble in the energy space from 2015 and 2016 continued into 2017 as companies continued to deal with the effects of a commodity rout even after the price of oil has stabilised. The leveraged loan default rates have been much higher for 2015-17 than in the global financial crisis. For reference, Texas law firm Haynes & Boone has monitored the Chapter 11 filings of oil and gas companies. From 2015 through 31 October of last year, 134 such businesses have sought court protection.

Retail experienced a particularly tough year. Many of the headline-grabbing bankruptcy filings came from household-name retailers, including Gymboree, Payless ShoeSource and Toys R Us. All were owned by private equity firms: Gymboree by Bain Capital; Payless by Golden Gate Capital and Blum Capital; and Toys R Us by Bain Capital, KKR and Vornado Realty Trust.

Energy and retail made up a majority of the institutional leveraged loan defaults in 2017. By far the largest energy default was Ocean Rig UDW at $3.12 billion. J. Crew Group and Toys R Us were the two largest retail defaults at $1.37 billion and $1.82 billion, respectively. Broadcasting and media’s single loan default from Cumulus Media’s $1.73 billion in leveraged loan debt due to the company’s Chapter 11 filing. Broadcasting and media will likely be a large contributor to defaults this year, namely because of iHeartCommunications.

The New York-based ratings agency’s report includes a list of loans of primary concern, or those that have the highest risk of defaulting, which Fitch defines as a missed interest payment, distressed debt exchange or a Chapter 11 bankruptcy filing.

Of the 10 largest leveraged loans by dollar amount on that list, seven are owned by private equity firms. An eighth, Millennium Health, previously filed for bankruptcy in 2015, and as a result, private equity firm TA Associates, which acquired the company in 2010, handed control of Millennium Health to the company’s pre-Chapter 11 case lenders, which include multiple business development companies. Those BDCs holding Millennium equity include KCAP Financial, American Capital Senior Floating and Saratoga Investment Corporation.