Distressed Credit Digest

July 12, 2020

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Distressed/High Yield Watchlist

Tracking 237 credits from 145 companies
Click here for the full watchlist

Added (1 new company)
Norwegian Cruise (NLCH)

Removed (1 removed company)
Sanchez Energy (SNEC)

Top Movers for the Week

Bottom Movers for the Week

Highlights

AMC Entertainment announced a final amended exchange agreement with subordinated bondholders late Friday night. Supported by nearly 75% of subordinated bonds, will be exchanged at a discount into new Second Lien Cash/PIK notes. The holders of those notes will also have the right to purchase 1st Lien Notes. The company plans to sell additional $300M of First Lien Notes. $200M for the Sub Notes and $100M for the Convertible Notes. Article Link 

Party City (PRTY) early tender expired Friday for its recent debt exchange proposal. It was reported earlier this month that nearly 65% of holders have already agreed. The company needs 98% for it to be a successful exchange and remaining holders have until July 24 to submit. PRTY bonds traded lower by 7 points to 15.00 this week.

American Airlines (AAL) capital structure was lower this past week again. The newly issued secured AAL 11.75 ’25 traded lower by 4pts to 90.75 yielding 14.4%.

Conn’s Inc (CONN) traded lower by 4.5pts on light volume to end the week at 80.50 to yield 19.7%

Men’s Wearhouse / Tailored Brans (TLRD 7.00 ’22) continued its fall after failing to make its July coupon payment. The notes ended the week down another 7pts to 2.75 as a bankruptcy filing is expected within the next two weeks. 

Diebold (DBD) was higher by 5.5pts to 86.00 yielding 13.4%.

Hertz (HTZ) unsecured notes traded higher by 6.50pts to 39.50 on back of the company selling $1B worth of used car inventory.

Washington Prime Group (WPG 6.45 ’24) traded lower by 6pts to 50, an all-time low.

 


Recovery Valuation for Chesapeake Energy Creditors

Chesapeake Energy filed for bankruptcy protection on June 28, 2020 due to its high levels of debt. With over $7B of total debt, the company entered into a Restructuring Support Agreement (“RSA”) with its lenders. They also secured $925M in debtor-in-possession (“DIP”) financing from some of its revolving credit facility (“RCF”) lenders. The RCF also agreed to provide exit financing up to $2.5B.
 
While the RSA needs to be officially approved by the court, the majority of holders have agreed to the proposed plan. At the time of filing, 100% of the RCF, 87% of the Term Loan, 60% of the 2nd Lien Secured Notes, and 27% of the Senior Unsecured Notes have agreed to the terms.
Weeks before filing, CHK common stock rose above $70 a share, a market capitalization of $675M. It now trades around $7 with a market capitalization of $65M. It is expected that all preferred and common shares will be cancelled upon emergence from bankruptcy.

Chesapeake’s RSA — Who is getting what?

The pre-arranged plan of reorganization (POR) sets the Plan’s Value at $3.25B total enterprise value. While the revolving credit facility will be refinanced into new exit facility loans, the remainder of the capital structure will be equitized through plan shares, rights offering shares, and a series of warrants.

Plan Distributed Shares
The plan distributed shares given to creditors are subject to dilution by the right offerings, warrants and management investment plan (“MIP”).

First Liens — will receive 76% of the total plan distributed shares
Second Liens — will receive 12% of the total plan distributed shares
Unsecured Notes — will receive 12% of the total plan distributed shares

Rights Offering
The following classes/parties will be able to participate in a rights offering to purchase equity at a 35% discount from the Plan’s Value ($3.25B TEV) .

First Liens — will receive 63.75% of the rights offering
Second Liens — will receive 11.25% of the rights offering
Backstop Parties* — will receive 25% of the rights offering (plus 10% fee received in shares)
*The backstop group will be split among the First Liens (77%) & Franklin (23%).

Warrants
There will be three sets of 5 year warrants that set with strike prices based on total enterprise value upon emergence: Warrant A ($4B TEV), Warrant B ($4.5B TEV) and Warrant C ($5.0B TEV). Each warrant class will receive 10% of the reorganized stock after the rights offering but subject to dilution by the MIP.

Second Liens — will receive 100% of the Warrant A and Warrant B distributions as well as 50% of the Warrant C distribution
Unsecured Notes — will receive 50% of the Warrant C distribution

Bond Recovery Analysis

Now, I will attempt to estimate the recovery values for each class of creditors. For calculation purposes we will assume the following: the plan distribution shares will be set at 100M, all profits from the rights offering will go into the bond recoveries and the warrants will be valued using a 50% implied volatility with 5 years to expiration.

As it was mentioned before, the Plan value is set at $3.25B total enterprise value (TEV). Shown below is a recovery table of creditors at various TEVs.

https://docs.google.com/spreadsheets/d/17CE82ulzQX9KuRBMBeWXdyyx6LSjXqdaTepEc27A-8s

If you already requested access to the Distressed Watchlist in Google Sheets, you can view this calculation table in the CHK Recovery tab. It should be noted that it was a bit unclear how many warrant shares would be issued in regards to the total shares. Yet, it would only effect the recovery values slightly. 

Conclusion

Chesapeake Energy has been over levered for a very long time. It will be interesting to see how the reorganized company trades with a more sustainable balance sheet. If the company was to trade at a $5B TEV, the first lien creditors would realize a full recovery while second liens and unsecured creditors would have meaningful upside from current trading levels.

 

*Special thanks to Jack Dean for assisting me in spreading the numbers on Chesapeake Energy. Jack is currently studying Finance at Lehigh University. I highly recommend you connect with him on LinkedIn if you are a looking for young talent.

Jack Dean — LinkedIn Profile


I am Rich, the co-founder of Koyfin. As a former distressed high-yield trader now designer/developer, I wanted to share some thoughts and observations I see in the distressed high-yield corporate bond market. During my trading days, I shared a daily distressed digest with clients containing trading color and news. Now, I hope to share them with you. Feel free to follow me on Twitter @koyfinTrader as well as share any feedback. My DMs are always open.