22 FEBRUARY 2016

CONTACTS

CREDIT SENSITIVITY IS GROWING

Christina Padgett
Senior Vice President
+1.212.553.4164
christina.padgett@moodys.com

Weaker pricing in the leveraged finance market reflects heightened credit sensitivity and is spreading
beyond sectors directly under pressure from low energy prices. Exacerbating conditions is the
slowdown in CLO formation and diminished loan and high yield bond mutual fund investment. New
LBO transactions are likely to remain marginal in part as strategic M&A continues to be more
compelling. The pace of refinancings should slow as pricing remains unattractive for borrowers. The
US spec-grade default forecast continues to worsen, with an increase to 4.7% in January 2017 from
3.1% at the end of this January.

Tom Marshella
Managing Director
US and Americas Corporate Finance
+1.212.553.4668
tom.marshella@moodys.com

FEATURE ARTICLES

ALSO IN THIS ISSUE

Three-Year Refunding Index Continues its
Free Fall
Heat Map: B3 Negative And Lower
Sector Weightings
Oil & Gas Sends List to Six-Year High,
Fueling Forecast for More Defaults
For High-Yield, 2015 Was
a Year of Discontent

Consensus Warns of a Perilously Wide High-Yield Spread

10

SGL Monitor: LSI Pushes Higher on the Back of Energy, Mining

12

The Liquidity-Stress Index (LSI) rose to 8.1% in mid-February from 7.9% in January as
the oil & gas LSI pushed into record territory.

13

Default Rate to More than Double to 4.2% 14

by January 2017
App A: B3 Negative & Lower Ratings List

16

App B: Probability Of Default Ratings

17

App. C: Covenant Quality Scores: January

High-Yield Bond Issues

20

App D: Median Credit Metrics for Issuers

at Ba1 and Below

21

Elevated market volatility both reflects and amplifies risk aversion.

Protection Improves in January Amid Tepid Issuance

The Covenant Quality Index strengthened to 4.30 in January from 4.32 in December.

Maturity Wall Pushed to 2017, But Access Could be Disrupted

11

Low-rated companies would be most exposed to a disruption.

LEVERAGED FINANCE SNAPSHOT

EXHIBIT 1

Moody's Credit Cycle Gauge: Risks Are Rising

Leveraged Finance Heat Map: red indicates index is trending negative

ALSO READ
High Yield Interest (European Edition)
High Yield Interest (Asian Edition)

Source: Moody's Investors Service

* LSI: from 2002, CQI: from 2011, B3-Neg: from 2007, Refunding: from 2002. Data through Jan. 31

MOODYS.COM

TRENDS IN LEVERAGED FINANCE

The spec-grade LSI rose to
8.1% in mid-February from
7.9% in January, as the oil
& gas LSI jumped to 24.4%,
pushing into record
territory. The LSIs ongoing
climb since late 2014
moved the index above its
long-term average in
December and signals a
rising default rate in 2016
that could worsen as the
year goes on. (Ex. 2)

EXHIBIT 2

Liquidity-Stress Index Points to Rising Default Rate

Moody's Liquidity Stress Index

Covenant Stress Index

1-year US spec-grade default rate

AVG Long-term LSI

25%

23 FEBRUARY 2016
23 FEBRUARY 2016

20%
15%
10%

LSI Long-Term Avg: 6.7%

5%
0%
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Jan-11

Jan-12

Jan-13 Jan-14 Jan-15

Jan-16

Jan-17

The LSI 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. The more SGL-4 rated companies there are, the higher the index. The MCSI reflects the percentage of SGL-rated companies with the weakest
score for the covenant component of liquidity analysis. Source: Moodys Investors Service.

The three-year refunding

index declined to 4.7x in
January 2016 from 6.6x in
January 2015. The threeyear index has dropped
59% from its peak of 11.5x
in July 2007, during which
time refinancing conditions
were significantly more
favorable. (Ex. 4)

EXHIBIT 3

B3 Negative and Lower List Hit Another Multi-Year High as of February 1

B3-PD/Caa1-PD

Caa2-PD/Caa3-PD

Ca-PD/C-PD

3-Month Moving Average

290
270
250
230
210
190
170
150
130
110

Feb-16

Jan-16

Dec-15

Nov-15

Oct-15

Sep-15

Jul-15

Aug-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

Jan-15

Dec-14

Oct-14

Nov-14

Sep-14

Aug-14

Jul-14

Jun-14

May-14

Apr-14

Mar-14

90

Feb-14

The list hit another multiyear high of 264, and is now

only 27 issuers away from
its credit-crisis peak. On a
monthly basis, the
speculative-grade group
grew by 6%, while on a
yearly basis, it surged by
almost 44% as of February
1. The majority of new
additions came from oil &
gas, followed by metals &
mining, chemicals
and coal. (Ex. 3)

Chart scale begins at 90 companies; first 90 are B3/Caa1. Source: Moodys Investors Service.

EXHIBIT 4

Refinancing Risk Continued to Rise in December

1 - Year Moodys Refunding Index: RI (1)

3 - Year Moody's Refunding Index: RI (3)

25.0x
20.0x
15.0x
10.0x
5.0x

2010

2011

2012

2013

2014

2015

Jan

Nov

Sep

July

May

Jan

Mar

Sep

Nov

July

May

Mar

Jan

Nov

Sep

July

May

Mar

Jan

Nov

July

Sept

Apr

Feb

Dec

Oct

Aug

June

Apr

Feb

Dec

Oct

Aug

June

Apr

Feb

0.0x

2016

Source: Moodys Investors Service. Index is a ratio of debt issuance to upcoming maturities. It increases as refinancing risk falls. See commentary, page 8.

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.

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

Thus far in 2016 issuance

has been light amid broadbased volatility, energy
sector distress and
inhibitive pricing. Issuance
will remain constrained by
a flight to quality and a
slowdown in CLO
formation, and ongoing
mutual fund outflows.
Investor caution may
obviate some regulatory
concerns, though we
anticipate an increased
focus on covenant quality.
(Ex. 5 and 6)

EXHIBIT 5

Institutional Non-Financial Loan and Bond Issuance Has Been Constrained

25.0
20.0
15.0
$23

10.0
$11

5.0

$6

$5
0.0
YTD 2015

YTD 2016

YTD 2015

Leveraged loans

YTD 2016
High-yield bonds

Year-to-date data as of 5 Feb. 2016. Figures in US$ billions. Loan data reflects completed deals. Source: Dealogic, Moody's Investors Service Estimates.
EXHIBIT 6

Rating Breakdown of Leveraged Loans and Bond issuances

B

Ba
100.0%
90.0%
80.0%
70.0%

Caa-Ca

6.7%

3.0%

34.6%

42.2%

0.0%

4.2%

53.6%

60.0%

74.1%

50.0%
40.0%
30.0%

58.6%

54.7%

20.0%

46.4%
21.8%

10.0%
0.0%
YTD 2015

YTD 2016

YTD 2015

Leveraged Loans

New leveraged loan and

high yield issuers have
mostly remained on the
sidelines so far in 2016.
Downgrades and more
exuberant times have left
the rating distribution of
the sector relatively weak.
The potential for
investment grade
downgrades (for example,
those facing commodity
pressure) may increase the
Ba population somewhat
over time. (Ex. 7)

YTD 2016
High-Yield Bonds

Year-to-date data as of 5 Feb. 2016. Figures in US$ billions. Loan data reflects completed deals. Source: Dealogic, Moody's Investors Service Estimates.
EXHIBIT 7

B2, B3 Dominates Total Speculative-Grade Population

North American New Issuer Corporate Family Ratings
Ba1%

Ba2%

Ba3%

B1%

B2%

B3%

Caa and below %

100%
80%
60%
40%
20%
0%
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016YTD

Source: Moodys Investors Service. * Year-to-date data as of 1 February 2016

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

MARKET OUTLOOK
Our CQI continues to
reflect weak-level
protection though
protection improved in
January amid tepid
issuance. HY-Lite bonds are
absent from the market and
the Covenant Quality Index
improved slightly. We
predict a modest but
sustained improvement in
covenant quality in 2016.
(Ex.8)

EXHIBIT 8

Spread to Benchmark Widens, Reflecting Disconnect Between Investor Protections, Risk Premiums
Average Benchmark Spread Versus Moodys Covenant Quality Index

Covenant Quality Index*

Bond Spread**
3.20
700.0
3.30
650.0
3.40
600.0
3.50
3.60
550.0
3.70
500.0
3.80
3.90
450.0
4.00
400.0
4.10
350.0
4.20
4.30
300.0
4.40
250.0
4.50
4.60
200.0
Jan-11
Jul-15
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jan-16
Moodys Covenant Quality Index (CQI) tracks the degree of overall investor protection in the covenant packages of high-yield bonds issued in the US
and Canada on a three-month rolling average basis. Spread reflects difference between coupon and Treasury. See CQI commentary on page 8.
Source: Moodys High-Yield Covenant Database

EXHIBIT 9

Despite an increase in
downgrades and market
gyrations, credit rating
volatility is below the longterm average covering
1983 to YTD2015. (Ex. 9)

Three-Month North American Corporate Credit Rating Volatility

0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00

This graph shows the gross average number of notches a credit will change over a 3 month backward-looking horizon. Source: Moodys Investors Service

Downgrades have been

significantly outpacing
upgrades over the last six
months. The commodity
sectors have experienced
sector wide reviews for
downgrades as well. To
date, downgrades have
been dominated by oil and
gas and commodity issuers
but other sector are also
showing weakness. (Ex.10)

EXHIBIT 10

Corporate Speculative Grade Downgrades Continue to Accelerate

Downgrades

Upgrades

90
80
70
60
50
40
30
20
10
0
Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Source: Americas CFG Actions

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

MARKET OUTLOOK
John Lonski
Moodys Analytics
New York

Recessions were either

present or less than a
year away each time the
high-yield bond spreads
moving 12-month
average topped 600
basis points two years
after the cycle
bottomed.

Consensus Warns of a Perilously Wide High-Yield Spread

Elevated market volatility both reflects and amplifies risk aversion. The widening of the high-yield bond
from its first-quarter 2015 average of 495 basis points (bp) to a February-to-date average of 847 bp
complements a downward revision of the consensus projection of 2016s real GDP growth from Q1-2015s
2.9% to a recent 2.1%. Of special importance to earnings-sensitive securities such as high-yield bonds was
the downgrading of the consensus estimate of 2016s growth of pretax operating profits from Q1-2015s
4.1% to February 2016s 1.5%.
Even after excluding the hard-hit energy sector, recent estimates for business sales warn of subpar
profitability that should restrain business outlays on capital goods and staff. For the 78% of the S&P 500s
non-energy member companies that have reported for 2015s final quarter, a meager 0.3% annual uptick by
revenues limited the groups operating profits to a 1.0% gain. Also, after slowing to a six-year low of 0.9%
in Q4-2015, business sales excluding sales of energy products may rise by only 1.4% yearly for January 2016.
The high-yield bond spreads month-long average has been at least 800 bp for only 32, or 8.6%, of the 373
months since year-end 1984. Ultra-wide high-yield spreads have offered valuable insight regarding the US
economys position in the business cycle. For example, a recession was either fast approaching or already
present whenever the high-yield spreads month-long average first broke above 800 bp more than two
years after a business cycle bottom.
EXHIBIT 11

By Reducing Liquidity, Very Wide Spreads Help to Boost the High-Yield Default Rate
US High-Yield Bond Spread: basis points (bp) ( L )

US High-Yield Default Rate: %, actual & projected ( R )

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
Dec-93

Jul-95

Feb-97 Sep-98 Apr-00 Nov-01 Jun-03 Jan-05 Aug-06 Mar-08 Oct-09 May-11 Dec-12

Jul-14

14.5
13.5
12.5
11.5
10.5
9.5
8.5
7.5
6.5
5.5
4.5
3.5
2.5
1.5
0.5
Feb-16

Source: Moody's Monthly Default Report, Moody's Capital Markets

Moreover, complacency is ill advised when viewing the high-yield spread in terms of a moving 12-month
average. Recessions were either present or less than a year away each time the high-yield bond spreads
moving 12-month average topped 600 bp two years after the cycle bottomed. Thus, heightened sensitivity
to risk is warranted in view of how the high-yield spreads latest yearlong average was 573 bp and rising.
Though consensus projections for the high-yield bond spread are lacking, both the Philadelphia Federal
Reserve Banks Survey of Professional Forecasters and Blue Chip Financial Indicators supply consensus views
on Moodys long-term Baa corporate bond yield. Given the latters very strong correlation of 0.93 since
September 1988 with the high-yield bond spread, a consensus forecast for the high-yield spread can be

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

MARKET OUTLOOK
inferred from consensus outlooks for the Baa corporate bond yield and the relevant
benchmark Treasury yield.
As derived from the unweighted average of the latest available consensus forecasts, Moodys long-term Baa
corporate bond yield spread is expected to average 250 bp over the next 12 months. A 250 bp spread for
the Baa corporate yield supplies an expected midpoint forecast of 781 bp for the high-yield bond spread
during the next 12 months, according to an ordinary least squares regression model.
Such a wide spread over a year-long span warns of both a well-above trend default rate and elevated
recession risks. As derived from the statistical relationship between the US high-yield default rate and the
high-yield bond spreads yearlong average, a reading of 781 bp for the latter tends to be associated with a
default rate of 7.7%. Thus, if the high-yield spread averages 781 bp over the next year, the high-yield
default rate should rise considerably above the 3.1% of the year-ended January 2016.
However, to the degree the attainment of a 7.7% default rate by Q1-2017 is viewed as being unlikely,
February-to-dates average high-yield spread of 847 bp implies that the composite speculative-grade bond
yield now substantially overcompensates for default risk. Still, the default rates now- rising trend may limit
the scope of any rally by high-yield debt.
EXHIBIT 12

Wider Bank Loan Spreads Point to Climb in High-Yield Loan Defaults

US High-Yield Loan Default Rate: % ( L )

US High-Yield Loan Spread: bp ( R )

12.0%

1,775

11.0%
10.0%

1,575

9.0%

1,375

8.0%

1,175

7.0%
6.0%

975

5.0%

775

4.0%
3.0%

575

2.0%

375

1.0%
0.0%
Sep-96

Feb-99

Jul-01

Dec-03

May-06

Oct-08

Mar-11

Aug-13

175
Jan-16

Source: Moody' s Monthly Default Report, Moody' s Capital Markets

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

SPECULATIVE GRADE LIQUIDITY

John Puchalla
New York

The energy sector

continues to be the main
driver of liquidity strain
and defaults. So far in
February there were 15
SGL downgrades versus
just four upgrades.

SGL Monitor: LSI Pushes Higher on the Back of Energy,

Mining
Originally published 17 February 2016
Moodys Liquidity-Stress Index (LSI) for speculative-grade issuers rose to 8.1% in mid-February, up from
7.9% in January as the oil & gas LSI pushes into record territory. The index has been climbing since late 2014
and crossed above its long-term average in December. That points to a rising default rate in 2016 and
beyond. Moodys projects the US speculative-grade default rate will rise to a six-year high of 4.7% in
January 2017, from 3.1% last month. That would put the default rate in range of surpassing its 4.7% longterm average in early 2017.
The energy sector continues to be the main driver of liquidity strain and defaults. So far in February there
were 15 SGL downgrades versus just four upgrades. Eleven of those downgrades were for energy companies,
the ratings of which we are systematically reviewing in light of persistently low oil & gas prices. The Oil &
Gas LSI rose to 24.4% in mid-February, up from 21.4% last month, a level that if sustained will nearly match
the previous 24.5% peak reached in March 2009.
The LSI excluding oil & gas remains below its 6.5% long-term average, but is starting to show cracks. While
the rise in the LSI over the last two years can be mainly traced to energy and commodities, liquidity stress
has crept slowly into other sectors, mostly where lower-rated companies have experienced operating and
cash-flow constraints or have maturities over the next 12-18 months that will be more difficult to resolve
given the sharp jump in borrowing costs. Though the index dropped to 3.9% in mid-February, from 4.5% in
January, the decline was largely due to defaults an ominous sign that indicates liquidity strains are
spreading modestly beyond the oil & gas sector.
US speculative-grade companies still have liquidity support from decent maturity profiles, a lack of
widespread covenant pressures and a modest US economic expansion. However, soft developing-market
growth including the slowdown in China that has had such a powerful effect on commodity prices and
widening credit spreads that limit speculative-grade debt issuance, are stacking on liquidity and default-rate
pressure. Downward pressure on revenues and operating cash flow are the primary driver of liquidity
weakness at present, but we are also starting to see maturity and covenant issues come into play. If the
economic expansion begins to fail, it could pile on the pressure for companies already struggling
with liquidity issues.
While maturity profiles for many US spec-grade companies remain relatively healthy through 2016, our
refunding index shows that liquidity pressure from maturities in 2017 is beginning to come into play. In
2016, we estimate bank debt and bond maturities for the broad U.S. spec-grade universe to rise to $28
billion, climbing to about $80 billion in 2017 and $400 billion in 2020. When maturities increase and new
issuance declines, our proprietary refunding index falls indicating declining maturity coverage. In January
2016, the longer-term three-year refunding index declined to 4.7x from 6.6x in January 2015, marking a
59% drop from its July 2007 peak. The last time the refunding index showed such a poor performance was
during the 2009 2010 period, when it bottomed out at 1.5x and showed an average performance of 4.9x
during those two years.
For the full report, please see: SGL Monitor: LSI Pushes Higher on the Back of Energy, Mining

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

COVENANT QUALITY
Evan Friedman
Danny Gao
New York

North American Covenant Quality Index

Protection Improves in January Amid Tepid Issuance

Originally published 9 February 2016

Januarys high-yield
bonds had an average
covenant quality
score of 4.02,
improving by more
than half a point from
Decembers 4.53. This
reflects the limited
number of deals that
cleared the market
and the absence of
HY-lite transactions.

Covenant Quality Index (CQI) improves slightly. The CQI strengthened to 4.30 in January from 4.32 in

December, continuing to reflect weakest level covenant protection, and coming in 91 basis points weaker than
its record-best of 3.39 in April 2011. The index is a three-month rolling average CQ score weighted by each
months total number of bonds1. A lower score denotes stronger covenant quality on our scale from 1.0 to 5.0.
Only 38 bonds were issued during the three-month period, the lowest volume
since December 2011.

Single-month covenant quality improves dramatically. Januarys high-yield bonds had an average covenant
quality score of 4.02, improving by more than half a point from Decembers 4.53. This reflects the limited
number of deals that cleared the market and the absence of HY-lite transactions.

No Caa/Ca issuances clear the market in January. Historically, 20% of a months issuance volume consists

of Caa/Ca-rated bonds. However, in January, and for the second consecutive month, no such bonds cleared the
market, reflecting investors reluctance to accept riskier credits. The historical average CQ score for Caa/Carated
bonds is 3.62, so a lack of these bonds should move the CQI weaker. The CQIs improvement in the face of
diminished Caa/Ca issuance signifies that stronger covenants are being offered in the upper-echelons of the
speculative-grade market. Bonds rated single B the sweet spot in the high-yield market comprised 67% of
Januarys issuance. Thats up from 33% in December, and above the historical average of 49%. The covenant
quality of the four single B bonds that cleared in January improved slightly, averaging a score of 4.21, stronger
4.24 in December, but weaker than the historical average of 3.80. Ba-rated bonds accounted for the remaining
33% of the months issuance volume, lower than 67% in January, but in line with the historical average of 32%.
The average score for Decembers two Ba-rated bonds was 3.64, more than a full point stronger than the
December average of 4.68 and significantly stronger than the 4.40 historical average.

No HY-lite bonds issued in January. Of the six bonds issued in January, none feature lite packages, the first
month since August 2011 with no such issuances. The historical average for HY-lite is 22% and in December,
three of the six bonds had lite terms . bonds receive the weakest possible CQ score of 5.0.

EXHIBIT 13

Monthly Average Covenant Quality (CQ) Scores

All Bonds and Bonds Excluding High-Yield Lite
Avg. Score (incl. HY-Lite)

Avg. Score (excl. HY-Lite)

2.80
3.00

Stronger
Weaker

3.20
3.40

4.00

3.60
3.80

4.20
4.40

Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16

4.60

Source: Moodys High-Yield Covenant Database

For the full report, please see: Protection Improves in January Amid Tepid Issuance

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

REFINANCING
Tiina Siilaberg
New York

The three-year index

has dropped 59% from
its peak of 11.5x in July
2007 during which time
refinancing conditions
were significantly more
favorable.

Moodys Refunding Indices

Three-year Refunding Index Continues its Free-fall

The refunding indices are ratios of debt issuance to upcoming maturities. They decline when specgrade corporate maturities rise and new issuance falls, indicating that refinancing risk is on the rise.
The three-year refunding index declined to 4.7x in January 2016 from 6.6x in January 2015. The three-year
index has dropped 59% from its peak of 11.5x in July 2007 during which time refinancing conditions were
significantly more favorable. The last time the refunding index showed such a poor performance was during
the 2009-2010 period, when the index bottomed out at 1.5x and showed an average performance of 4.9x
during those two years. The three-year index has been below its moving-average of 6.8x for over a year.
Moodys one-year Refunding Index declined 29% year-over-year to 11.5x in January 2016, versus 16.2x in
January 2015. The one-year Refunding Index remained almost flat on a month-over-month basis, as in
December 2015 the index came in at 11.4x. This is the second month the index is below its historical
average of 12.4x, indicating refinancing conditions are tightening. Overall, the one-year refunding index is
down 47% from its peak of 21.8x in September 2013.
High-yield bond issuance for rated US speculative-grade issuers amounted to $192 billion for the trailing 12
months ended in January 2016 versus $197 billion in December 2015. One-year rated high-yield bond
maturities now stand at $16.6 billion, compared with $12 billion a year ago, with three-year maturities at
$122 billion versus $88 billion a year ago.
Our Refunding Index indicates conditions are weaker than the historical norm given the recent weakness in
high-yield bond issuance and step-up in maturities. Both the one-year and three-year indices are currently
trending below their historical norm, indicating the markets ability to absorb upcoming
maturities is below average.
EXHIBIT 14

Refinancing Risk Continued to Rise in December

3 - Year Moody's Refunding Index: RI (3)

1 - Year Moodys Refunding Index: RI (1)

25.0x
20.0x
15.0x
10.0x
5.0x

2010

2011

2013

2014

2015

Jan

Sep

Nov

July

May

Jan

Mar

Sep

Nov

July

May

Jan

Mar

Sep

Nov

July

May

Jan

2012

Mar

Nov

Sept

Apr

July

Feb

Oct

Dec

Aug

Apr

June

Feb

Oct

Dec

Aug

Apr

June

Feb

0.0x

2016

The index indicates the markets ability to absorb spec-grade bonds maturing over the next 12-36 months given the current pace of issuance.
Source: Moodys Investors Service

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

ENERGY IN FOCUS
Julia Chursin
New York

Oil & gas reached yet

another historical high,
swelling to 28% of the
group, up 2.6% on a
monthly basis. That is
the highest increase out
of all 25 sectors we
track. Over the past
month the metals &
mining and chemicals
sectors shares on the
list have also grown by
90 and 70 basis points
respectively, but these
industries are nowhere
close to the top of the
list. Oil & gas is an
obvious outlier,
representing almost
one-third of the total of
this cohort.

Heat Map: B3 Negative And Lower Sector Weightings(%)

EXHIBIT 15

B3 Negative And Lower Sector Weightings (%)

Current

1 month ago

1 year ago

Number of
Issuers

2/1/2016

1/1/2016

2/1/2015

monthly delta

OIL & GAS

74

28.0%

25.4%

10.9%

2.6%

SERVICES

35

13.3%

13.7%

12.0%

-0.5%

RETAIL

18

6.8%

6.9%

8.2%

0.0%

MANUFACTURING

14

5.3%

5.6%

7.6%

-0.3%

CONSUMER PRODUCTS

13

4.9%

5.6%

5.4%

-0.7%

TECHNOLOGY

13

4.9%

5.2%

4.3%

-0.3%

MEDIA

12

4.5%

4.8%

6.5%

-0.3%

METALS & MINING

11

4.2%

3.2%

3.8%

0.9%

WHLSL DSTRBTN

11

4.2%

4.4%

3.8%

-0.3%

DEFENSE

3.4%

3.6%

3.8%

-0.2%

ENVIRONMENT

2.3%

2.4%

2.2%

-0.1%

GAMING: CASINOS

2.3%

2.4%

6.0%

-0.1%

TELECOMMUNICATIONS

2.3%

2.4%

3.3%

-0.1%

AIRCRAFT & AEROSPACE

1.9%

2.0%

1.6%

-0.1%

CHEMICALS

1.9%

1.2%

2.2%

0.7%

CONSTR & ENGINEERING SERV

1.9%

2.4%

3.3%

-0.5%

ENERGY: OTHER

1.9%

1.6%

2.2%

0.3%

RESTAURANTS

1.5%

1.6%

4.3%

-0.1%

PACKAGING

1.1%

1.2%

1.1%

-0.1%

AUTOMOTIVE

0.8%

0.8%

1.6%

0.0%

HEALTHCARE

0.8%

0.8%

2.2%

0.0%

PHARMACEUTICALS

0.8%

0.8%

1.1%

0.0%

TRANSPORTATION

0.8%

0.8%

1.6%

0.0%

NATURAL PRODUCTS PROCESSOR

0.4%

0.4%

1.1%

0.0%

FOREST PRODUCTS

0.0%

0.4%

0.0%

-0.4%

Sector

"Oil & Gas" includes E&P, Oilfield Services and Midstream/Transmission gas companies
"Energy: Other:" includes Coal and Electricity production companies
Note: In the "monthly delta" column darkening red indicates increases, while darkening green indicates decreases

10

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

RECENT RESEARCH
Kevin Cassidy
Tiina Siilaberg
New York

Almost 70% ($444

billion) of the five-year
maturities will come
due in 2016 and 2017,
with 40% ($258
billion) of the total
five-year speculativegrade bonds and credit
facilities maturing in
2017 alone.

Refunding Risk and Needs 2013-2017: US Speculative-Grade Corporations

Maturity Wall Pushed to 2017, but Global Macro

Issues
23 FEBRUARY 2016
23 FEBRUARY 2016
Could Disrupt Market Access
Low-rated companies would be most exposed to a disruption
Originally published 5 February 2013
About $645 billion of speculative-grade, non-financial corporate debt is maturing over the next five years.
That amount is down from the $668 billion we cited in last years report covering 2012-2016 maturities and
from the $693 billion we noted in our 2011 report covering 2011-2015 maturities.
Companies continue to extend the maturity wall, so that the peak year for speculative-grade bank credit
facility and bond maturities has moved to 2017 from 2016. Almost 70% ($444 billion) of the five-year
maturities will come due in 2016 and 2017, with 40% ($258 billion) of the total five-year speculative-grade
bonds and credit facilities maturing in 2017 alone.
In contrast, we reported last year that 61% ($408 billion) of the five-year maturities was due in the final two
years and about 37% ($246 billion) of maturities was set to mature in the fifth year, 2016.
While near-term refinancing risks appear modest, the increase in refinancing needs over the ensuing threeyear period, 2015-2017, has heightened the intermediate risk. Companies will remain vulnerable to the
possibility of rising interest rates and widening spreads. The risk of wider spreads and/or higher rates would
result in higher financing costs and could reduce market access.
As in previous years, the telecommunication/technology/media sector has the highest percentage of
speculative-grade debt maturing over the next five years; it accounts for 27%, or $172 billon, of the five-year
total. This proportion was similar to last years finding of 28% ($189 billion). The sector includes some of
the largest rated speculative-grade companies, such as Clear Channel Communications and Clearwire
Communication.
PULL-FORWARD EFFECT COULD INCREASE NEAR-TERM MATURITIES
Although 2013-2015 refinancing needs are relatively benign at $200 billion, the pull-forward effect, which
refers to companies refinancing several maturities contained in the same bank credit agreement when the
first debt comes due, could accelerate the maturity profile. Bank credit facilities maturities alone could
double to $243 billion from $111 billion over the next three years, and total debt maturities could rise to
$332 billion from $200 billion due to this pull-forward effect.
For the full report, please see: Maturity Wall Pushed to 2017, but Global Macro Issues Could Disrupt Market
Access

11

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

RECENT RESEARCH
Moody's B3 Negative and Lower Corporate Ratings List

Julia Chursin
New York

The list hits a six-year

high, supporting the
case for an increasing
default rate for 2016.

Oil & Gas Sends List to Six-Year High, Fueling Forecast

for More Defaults
Originally published 26 January 2016
The number of companies on Moody's B3 Negative and Lower Corporate Ratings List reached a six-year
high of 248 as of January 1, 2016, up 36% from the previous year and 11% from the previous quarter. The
list includes all US non-financial companies with a probability of default rating (PDR) of B3 negative or
below. Companies are added to the list via downgrades or rating assignments at B3 negative or below. They
are removed from the list upon an upgrade to B3 stable or higher, or through a default or rating withdrawal.
Fueled mostly by downgrades in the increasingly challenged oil & gas sector, the list's steady growth in 2015
brought it within 42 companies of its credit-crisis peak of 291, reached in April 2009. Yet the list represents
just 16% of the overall North American highyield non-financial corporate population, compared to 21% at
the beginning of 2009.
Looking to 2016, the list and other Moody's proprietary indicators of speculative-grade credit suggest
deteriorating credit conditions for lower-rated companies. We forecast that the US speculative default rate
will rise to 4.4% in December 2016, up from 3.2% recordered at the end of 2015. While slightly higher than
2.8% we projected year ago, the default rate remains considerably more tame than its credit crisis peak of
14.7%, reached in the third quarter of 2009.
The list remained above its three-month moving average for most of 2015, easing a little at the beginning of
August but surging again in September, then remaining high. The list's growth is contained mostly to the oil
& gas sector; other sectors have yet to show a widespread commiserate distress.

Defaults remain main reason for leaving the list

Throughout 2015, defaults were the main reason for issuers dropping off the list. For companies that
remained on the list, ratings downgrades far exceeded upgrades.
Among the 109 companies that left the list last year, 49% filed for bankruptcy, completed a distressed
exchange or missed an interest payment, 18% had their ratings withdrawn and 33% had their ratings
upgraded or outlooks changed to stable or positive. Distressed exchanges comprised 55% of the total
number of defaults, and were mainly concentrated in the oil & gas sector. Between 1988 and 2007,
distressed exchanges accounted for only about 15% of defaults.
For the full report, please see: Moody's B3 Negative and Lower Corporate Ratings List; Oil & Gas Sends List to
Six-Year High, Fueling Forecast for More Defaults

12

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

RECENT RESEARCH
Julia Chursin
New York

The percentage of
companies carrying B3
corporate family
ratings climbed to
24% of the total for
leveraged finance at
the end of last year,
compared with 14% at
the beginning of 2009.

For High-Yield, 2015 Was a Year of Discontent

Originally published 11 February 2016

Spec-grade gauges flashing red for junk debt

Our various proprietary indicators of spec-grade credit stress have been showing strain on the back of the
energy bust. The Liquidity Stress Index rose as oil prices tumbled to its multi-year lows and the B3 Negative
and Lower List ticked up 36% year over year at the end of 2015, due mainly to downgrades in the energy
sector. The lower-rated cohort continued its rise at the beginning of 2016, hit another multi-year high of
264 as of February 1, and is now only 27 issuers away from its credit-crisis peak.
As our heat map with sector weightings shows, oil and gas remains the largest constituent of Moodys B3
Negative and Lower List) Due to continuing energy woes, the oil and gas sectors percentage of the total
reached yet another record of 28% as of February 1. That by far exceeds the sectors historical average of
9.2%, and the 4.8% observed in the midst of the credit crisis. The ratings quality for US spec-grade
corporate borrowers has deteriorated since the Great Recession. From 2009 through the end of 2015, B3
corporate family ratings (CFRs) climbed from 14% to 24% of the spec-grade universe, while overall B-rated
credits have increased from 57% to 66%. As high-yield investors became more risk averse, and pricing of
leveraged loans and high-yield debt increased precipitously, fewer issuers started out with B3 CFRs.
However, our rating distribution is still dominated by B2s and B3s, reflecting heightened activity over the
past several years and investors' appetite for high yield in the low interest rate environment.

Oil and gas distress not running out of gas

Lower oil and natural gas prices have directly affected cash flows and credit profiles for lower-rated E&P
companies, while indirectly affecting other energy companies such as drillers and oilfield service
providers.After oil prices plummeted from mid-2014 levels, high-yield oil and gas issuers (E&Ps in
particular), looking to shore up their weak balance sheets, piled on distressed exchanges. In the past, even
during oil price bust cycles, these debt-restructuring transactions were hardly used by these companies.

Overall, distressed exchanges dominate

Last years distribution of defaults is skewed towards distressed exchanges, the phenomenon that emerged
during Great Recession default cycle and continues unabated, as we noted in November (Distressed
Exchanges Remain Frequent Thanks to Oil & Gas, PE Firms.) In 2015, DEs accounted for 48% of total US
non-financial defaults that we tracked, and for 44% of defaults in 2009-10, the heart of the recession
default cycle. Their use was far more limited in the past, accounting for, on average, 15% of defaults
between 1988 and 2007. Generally, the goal of a DE is to buy time to avoid or delay bankruptcy, until a
company's operating conditions, or the industry or macro environment, improve enough to make one
unnecessary. In the best case, they can help overleveraged firms reduce debt enough to stay solvent and
avoid bankruptcy. But, they can also preserve value simply by pushing off a bankruptcy from the depths of a
default cycle to a more benign environment.
For the full report, please see: For High-Yield, 2015 Was a Year of Discontent

13

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

GLOBAL SPEC-GRADE CORPORATE DEFAULTS

Sharon Ou
New York

It might be small
consolation that we are
forecasting the global
speculative default rate
simply to reach its longterm average. The trend
line is not very
encouraging.

Default Rate to More than Double to 4.2% by

January 2017
Originally published 11 February 2016
The benign debt default environment that the global economy has enjoyed since 2009 is likely to come to
an end in about one year. Based on the default rate forecast model, Moodys believes that the speculativegrade default rate will slowly increase to 4.2% in one year from the current level of 3.4%. The default rate
has been inching up and has increased almost 75% from the 2% rate observed in January 2015. Ratings
actions, which are part of the inputs to the forecasting model are clearly on the downside, with significantly
more downgrades than upgrades in 2015 than in 2014.
Our forecast should not be very surprising given the current economic conditions, especially in certain
sectors like Oil and Gas and Metals and Mining. With commodity prices forecasted to stagnate at current
levels, many bond issuers in those industries are likely to face significant refinancing hurdles even in this low
interest rate environment. Metals and Mining and Oil and Gas, especially in the US, are expected to have
significant higher default rates of 12.9% and 7.1% respectively,counting all rated issuers, compared to the
expected speculative-grade US default rate of 4.7%. Oil & Gas in Europe is no different from the trouble
perspective, followed by Hotel, Gaming, & Leisure.
It might be small consolation that we are forecasting the global speculative default rate simply to reach its
long- term average. The trend line is not very encouraging, with the speculative-grade rate going from less
than 2.0% in Jan 2015, to 3.5% in Jan 2016, and 4.2% in Jan 2017.
EXHIBIT 16

US Trailing 12-Month Issuer-Weighted Spec-Grade Default Rate Forecasts

US_Actual

US_Baseline_Forecast

US_Pessimistic_Forecast

US_Optimistic_Forecast

16%
14%
12%
10%
8%
6%
4%
2%

1/1/2017

1/1/2016

7/1/2016

1/1/2015

7/1/2015

1/1/2014

7/1/2014

1/1/2013

7/1/2013

1/1/2012

7/1/2012

1/1/2011

7/1/2011

1/1/2010

7/1/2010

1/1/2009

7/1/2009

1/1/2008

7/1/2008

1/1/2007

7/1/2007

1/1/2006

7/1/2006

1/1/2005

7/1/2005

1/1/2004

7/1/2004

1/1/2003

7/1/2003

1/1/2002

7/1/2002

1/1/2001

7/1/2001

0%

Source: Moodys Investors Service

For the full report, please see: Default Rate to More than Double to 4.2% by January 2017

14

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

NORTH AMERICAN SPEC-GRADE DEFAULTS

EXHIBIT 17

YTD Moody's-Rated Bond/Loan/Deposit Defaults

Updated through January 31, 2016.
Company

Default Type

Sheridan Investment Partners II, LP

Distressed exchange

RCS Capital Corporation

Missed interest payment

Arch Coal, Inc.

Sheridan Investment Partners I, LLC
Verso Paper Holdings LLC
Total

Default Date

Bond

Loan

Total Debt

Domain

1/12/2016

$-

$70.00

$70.00

UNITED STATES

1/5/2016

$120.00

$683.81

$803.81

UNITED STATES

Prepackaged Chapter 11

1/11/2016

$3,225.00

$1,874.39

$5,099.39

UNITED STATES

Distressed exchange

1/12/2016

$-

$130.00

$130.00

UNITED STATES

Chapter 11

1/26/2016

$1,721.70

$736.25

$2,457.95

UNITED STATES

$5,066.70

$3,494.45

$8,561.15

The list initially only included CFG and FIG issuers which have rated bonds and/or loans within a year of default. Now it includes CFR only defaulters as well.
Ratings refer to estimated senior unsecured ratings.
Default amount in millions of USD.
Guaranteed debts are only added to the issuers but not to the guarantors in order to avoid double counting.
*China Fishery Group Limited only defaulted on guaranteed debts issued by other entities in this list and guaranteed by China Fishery Group.

15

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

APPENDIX A: B3 NEGATIVE & LOWER RATINGS LIST

The Moody's B3 Negative and Lower Corporate Ratings List includes all US non-financial corporate issuers
with a Probability of Default Rating of Caa1-PD or lower, a B3 PDR with a negative rating outlook or a B3PD with a rating under review for downgrade. For more information and analysis, please see our latest B3
Negative and Lower quarterly report. The following is a summary of Januarys activity. The rating list is
published monthly on Moodys.com
Composition of the Current Ratings List
Number of Companies

Prior List

248

Companies Added

20

Companies Removed

Current List

264
20

Additions Attributable To:

Downgrade

New Issue/Reinstatement

Outlook Lowered to Negative/ Placed on B3 RUR for Downgrade) for Downgrade)

11
4

Deletions Attributable To:

Upgrade

Default

Ratings Withdrawal

Outlook Raised to Stable or Higher ( or B3 RUR for Upgrade)

Rating Activity for Companies on Both the Current and Prior List
19

Rating Changes

Upgrade

Downgrade

19
21

Ratings Placed Under Review

Review For Upgrade

Review For Downgrade

21

Review Direction Uncertain

0
3

Outlook Changes

Outlook Raised To Positive

Outlook Raised To Stable

Outlook Lowered to Stable

Outlook Lowered To Negative

3
5

SGL Rating Changes*

SGL Upgrade

SGL Downgrade

Number of companies on the list rated SGL-4 (lowest liquidity rating)

50

Percentage of all companies with SGL-4 ratings that are also on the B3 Negative and Lower List

76%

* Moody's Speculative-Grade Liquidity (SGL) Ratings. SGL-4 is the lowest liquidity rating on our four-point scale. Moody's Liquidity-Stress Index
indicates the percentage of SGL-4 ratings among all SGL-rated companies. See our SGL topic page for more information.

16

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

APPENDIX B: PROBABILITY OF DEFAULT RATINGS

Companies Rated Caa2 and Below
The following list, extracted from Moodys B3 Negative and Lower Corporate Ratings List, shows all US non-financial companies with
Probability of Default Ratings (PDRs) of Caa2 or below as of 1 February 2016.
SGL Component Scores
Probability of
Default
Rating

Corporate
Family
Rating

Outlook

LGD Rating

SGL Rating

Cash Flow

Liquidity
Score

Caa2-PD

Caa2

NEG

56 - LGD4

SGL-3

Ca-PD

Caa3

NEG

34 - LGD3

SGL-4

Caa2-PD

Caa2

NEG

37 - LGD3

N/A

N/A

N/A

N/A

N/A

American Energy - Permian Basin, LLC

Caa3-PD

Caa3

NEG

08 - LGD1

SGL-4

American Energy - Woodford, LLC

Caa2-PD

Caa2

STA

62 - LGD4

SGL-3

American Gilsonite Holding Company

Caa2-PD

Caa2

NEG

54 - LGD4

N/A

N/A

N/A

N/A

N/A

Ascent Resources - Marcellus LLC

Caa2-PD

Caa2

NEG

32 - LGD3

SGL-4

Aspect Software, Inc.

Caa2-PD

Caa2

NEG

28 - LGD2

N/A

N/A

N/A

N/A

N/A

Associated Materials, LLC

Caa3-PD

Caa3

STA

58 - LGD4

N/A

N/A

N/A

N/A

N/A

Aurora Diagnostics Holdings, LLC

Caa2-PD

Caa2

STA

79 - LGD5

SGL-3

N/A

N/A

N/A

N/A

Autoparts Holdings Limited

Caa2-PD

Caa2

NEG

40 - LGD3

N/A

N/A

N/A

N/A

N/A

Claire's Stores, Inc.

Caa2-PD

Caa2

STA

32 - LGD3

SGL-4

Comstock Resources, Inc.

Caa2-PD

Caa2

NEG

27 - LGD2

SGL-3

Constellation Enterprises, LLC

Caa3-PD

Caa3

NEG

53 - LGD4

N/A

N/A

N/A

N/A

N/A

Corporate Risk Holdings, LLC.

Caa3-PD

Caa2

STA

01 - LGD1

N/A

N/A

N/A

N/A

N/A

Denver Parent Corporation

Ca-PD

Ca

NEG

89 - LGD5

SGL-4

Dex Media, Inc.

Ca-PD

Ca

NEG

94 - LGD6

SGL-4

N/A

N/A

N/A

N/A

DynCorp International Inc.

Caa3-PD

Caa3

NEG

13 - LGD2

SGL-4

Eclipse Resources Corporation

Caa2-PD

Caa2

NEG

61 - LGD4

SGL-3

Energy XXI Gulf Coast, Inc.

Caa3-PD

Caa3

NEG

26 - LGD2

SGL-4

Euramax International, Inc.

Caa2-PD

Caa2

STA

44 - LGD3

N/A

N/A

N/A

N/A

N/A

EXCO Resources, Inc.

Caa2-PD

Caa2

STA

09 - LGD1

SGL-4

N/A

N/A

N/A

N/A

Fairmount Santrol, Inc.

Caa2-PD

Caa1

NEG

32 - LGD3

SGL-4

Goodrich Petroleum Corporation

Caa3-PD

Caa3

NEG

76 - LGD5

SGL-4

N/A

N/A

N/A

N/A

Halcon Resources Corporation

Caa2-PD

Caa2

STA

26 - LGD2

SGL-3

Ca-PD

Ca

NEG

42 - LGD3

SGL-4

N/A

N/A

N/A

N/A

iHeartCommunications, Inc.

Caa3-PD

Caa2

STA

20 - LGD2

SGL-3

ION Geophysical Corporation

Caa2-PD

Caa2

NEG

62 - LGD4

SGL-4

Iracore International Holdings, Inc.

Caa2-PD

Caa2

NEG

58 - LGD4

SGL-4

Ca-PD

Ca

NEG

67 - LGD4

SGL-4

Isola USA Corp.

Caa2-PD

Caa2

NEG

13 - LGD2

N/A

N/A

N/A

N/A

N/A

Key Energy Services, Inc.

Caa2-PD

Caa2

NEG

71 - LGD5

SGL-4

Kratos Defense & Security Solutions, Inc.

Caa2-PD

Caa2

STA

56 - LGD4

SGL-3

Company

A.M. Castle & Co.

Abaco Energy Technologies LLC
AM General, LLC

Horsehead Holding Corp.

IronGate Energy Services, LLC

17

LEVERAGED FINANCE INTEREST

Covenant Alternative
Score
Score

22 FEBRUARY 2016

APPENDIX B: PROBABILITY OF DEFAULT RATINGS

SGL Component Scores
Probability of
Default
Rating

Corporate
Family
Rating

Outlook

LGD Rating

SGL Rating

Cash Flow

Liquidity
Score

LBI Media, Inc.

Caa2-PD

Caa2

NEG

28 - LGD2

N/A

N/A

N/A

N/A

N/A

Liberty Tire Recycling Holdco, LLC

Caa2-PD

Caa2

STA

32 - LGD3

N/A

N/A

N/A

N/A

N/A

Company

Covenant Alternative
Score
Score

Linn Energy, LLC

Caa2-PD

Caa1

NEG

53 - LGD4

SGL-3

Logan's Roadhouse Inc.

Caa3-PD

Caa3

NEG

50 - LGD4

SGL-4

Ca-PD

Ca

NEG

15 - LGD2

N/A

N/A

N/A

N/A

N/A

MD America Energy, LLC

Caa2-PD

Caa2

POS

49 - LGD3

SGL-3

NGPL PipeCo. LLC

Caa2-PD

Caa2

NEG

49 - LGD3

SGL-4

Noranda Aluminum Acquisition Corporation

Ca-PD

Ca

NEG

46 - LGD3

SGL-4

N/A

N/A

N/A

N/A

Paragon Offshore plc

Ca-PD

Ca

NEG

27 - LGD2

SGL-4

Peabody Energy Corporation

Caa3-PD

Caa3

NEG

16 - LGD2

SGL-3

N/A

N/A

N/A

N/A

Penn Virginia Corporation

Caa3-PD

Caa3

NEG

62 - LGD4

SGL-4

PetroQuest Energy, Inc

Caa3-PD

Caa3

NEG

93 - LGD6

SGL-4

N/A

N/A

N/A

N/A

Preferred Proppants, LLC

Caa2-PD

Caa2

STA

32 - LGD3

N/A

N/A

N/A

N/A

N/A

Production Resource Group, Inc.

Caa2-PD

Caa2

NEG

77 - LGD5

N/A

N/A

N/A

N/A

N/A

ProPetro Services, Inc.

Caa2-PD

Caa2

NEG

47 - LGD3

SGL-4

N/A

N/A

N/A

N/A

Proserv Global Inc.

Caa3-PD

Caa3

NEG

43 - LGD3

N/A

N/A

N/A

N/A

N/A

PTC Group Holdings Corp.

Caa2-PD

Caa2

NEG

62 - LGD4

N/A

N/A

N/A

N/A

N/A

Mashantucket (Western) Pequot Tribe, CT

Restaurant Holding Company, LLC

Caa2-PD

Caa2

STA

36 - LGD3

N/A

N/A

N/A

N/A

N/A

Rex Energy Corporation

Caa3-PD

Caa3

NEG

69 - LGD4

SGL-4

N/A

N/A

N/A

N/A

RGIS Services, LLC

Caa2-PD

Caa1

NEG

34 - LGD3

N/A

N/A

N/A

N/A

N/A

SandRidge Energy, Inc.

Caa2-PD

Caa2

STA

19 - LGD2

SGL-2

Sequa Corporation

Caa2-PD

Caa2

NEG

37 - LGD3

N/A

N/A

N/A

N/A

N/A

Seventy Seven Energy Inc.

Caa3-PD

Caa3

NEG

62 - LGD4

SGL-3

Ca-PD

Ca

NEG

49 - LGD3

SGL-4

Sheridan Investment Partners I, LLC

Caa3-PD

Caa3

NEG

50 - LGD4

N/A

N/A

N/A

N/A

N/A

Sheridan Investment Partners II, LP

Caa3-PD

Caa3

NEG

50 - LGD4

N/A

N/A

N/A

N/A

N/A

Sheridan Production Partners I-A, LP

Caa3-PD

Caa3

NEG

50 - LGD4

N/A

N/A

N/A

N/A

N/A

SFX Entertainment, Inc.

Sheridan Production Partners II-A, LP

Caa3-PD

Caa3

NEG

50 - LGD4

N/A

N/A

N/A

N/A

N/A

Sheridan Production Partners II-M, LP

Caa3-PD

Caa3

NEG

50 - LGD4

N/A

N/A

N/A

N/A

N/A

Sheridan Production Partners I-M, LP

Caa3-PD

Caa3

NEG

50 - LGD4

N/A

N/A

N/A

N/A

N/A

Sidewinder Drilling Inc.

Caa3-PD

Caa3

NEG

66 - LGD4

SGL-4

Sierra Hamilton LLC

Caa3-PD

Caa3

NEG

52 - LGD4

N/A

N/A

N/A

N/A

N/A

Smile Brands Group Inc.

Caa2-PD

Caa2

NEG

32 - LGD3

N/A

N/A

N/A

N/A

N/A

Southcross Holdings Borrower LP

Ca-PD

Caa3

NEG

38 - LGD3

SGL-4

Spanish Broadcasting System, Inc.

Caa3-PD

Caa2

NEG

33 - LGD3

SGL-4

Sports Authority Inc. (The)

Caa3-PD

Caa3

NEG

49 - LGD3

N/A

N/A

N/A

N/A

N/A

Sprint Industrial Holdings, LLC

Caa2-PD

Caa2

NEG

35 - LGD3

N/A

N/A

N/A

N/A

N/A

18

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

APPENDIX B: PROBABILITY OF DEFAULT RATINGS

SGL Component Scores
Probability of
Default
Rating

Corporate
Family
Rating

Outlook

LGD Rating

SGL Rating

Cash Flow

Liquidity
Score

Stafford Logistics, Inc.

Caa2-PD

Caa1

STA

32 - LGD3

N/A

N/A

N/A

N/A

N/A

Stallion Oilfield Holdings, Inc.

Caa2-PD

Caa1

NEG

34 - LGD3

N/A

N/A

N/A

N/A

N/A

Things Remembered, Inc.

Caa2-PD

Caa1

NEG

24 - LGD2

N/A

N/A

N/A

N/A

N/A

Transworld Systems, Inc.

Caa2-PD

Caa2

NEG

54 - LGD4

N/A

N/A

N/A

N/A

N/A

UCI INTERNATIONAL, LLC

Caa3-PD

Caa3

STA

63 - LGD4

N/A

N/A

N/A

N/A

N/A

Valitas Health Services, Inc.

Caa3-PD

Caa3

NEG

32 - LGD3

N/A

N/A

N/A

N/A

N/A

Ca-PD

Ca

NEG

83 - LGD5

SGL-4

Company

Warren Resources, Inc.

Covenant Alternative
Score
Score

Wilton Brands LLC

Caa2-PD

Caa1

STA

44 - LGD3

N/A

N/A

N/A

N/A

N/A

Wise Metals Intermediate Holdings LLC

Caa2-PD

Caa2

NEG

94 - LGD6

N/A

N/A

N/A

N/A

N/A

19

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

APPENDIX C
Covenant Quality Scores: January High-Yield Bond Issues
Description of
Notes

Issuer

Rating at
issuance

RP
Score

PI
Score

Debt
Score

Lien
Score

Structure
Score

CoC
Score

CQ
Score

Benchmark
Spreads

TreeHouse Foods, Inc.

$775m 6.000%
Senior Notes due
2024

Ba3

3.65

3.10

4.50

3.50

1.50

2.30

3.43

412.0

GFL Environmental Inc.

$300m 9.875%
Senior Notes due
2021

B3

5.00

2.80

3.75

3.00

1.40

5.00

3.71

839.0

Lamar Media Corp.

$400m 5.750%
Senior Notes due
2026

Ba1

5.00

3.90

4.40

4.00

2.00

1.00

3.84

372.0

Microsemi Corporation

$450m 9.125%
Senior Notes due
2023

B2

5.00

4.50

4.45

4.00

2.75

2.30

4.12

711.0

GCP Applied Technologies

Inc.

$525m 9.500%
Senior Notes due
2023

B1

5.00

4.60

4.80

3.50

3.50

4.30

4.39

769.0

Pinnacle Foods Finance

LLC

$350m 5.875%
Senior Notes due
2024

B2

5.00

5.00

4.90

4.75

2.50

4.55

4.63

390.0

CQ Scoring Key

Stronger

CQ1

CQ2

CQ3

Strong

Good

Moderate

Upper
1.8 to
2.0

1.0

20

1.8

Lower
2.4 to
2.6

Upper
2.6 to
2.8

2.6

Weaker

Lower
3.2 to
3.4

Upper
3.4 to
3.6

3.4

LEVERAGED FINANCE INTEREST

CQ4

CQ5

Weak

Weakest

Lower
4.0 to
4.2

4.2

5.0

22 FEBRUARY 2016

APPENDIX D
Median Credit Metrics for Issuers at Ba1 and Below
EXHIBIT 17

Financial Flexibility North America Speculative Grade Issuers

Debt / EBITDA

Median Pct of EBITDA Converted to FCF

35%
28.7%

Debt/EBITDA Leverage

5x
4x

4.0x

3.7x

3.7x

4.3x

4.0x

4.1x

4.9x

4.6x

4.5x

4.1x

5.0x

30%
25%
20%

3x
15%
2x

15.2%

10.5%

10%

6.3%

1x

7.4%

6.6%

5.5%

5.9%

2011

2012

0x
2005

2006

2008

2007

2009

2010

5%

8.1%
4.3%

1.9%

2013

2014

Pct of EBITDA Coverted to FCF

6x

0%
LTM Q3-15

Source: Moodys Financial Metrics

EXHIBIT 18

Financial Flexibility North America Speculative Grade Issuers

Cash / EBITDA

Cash / Debt

Debt / EBITDA

60%

6x

4.0x

3.7x

3.7x

40%

4.1x

4.3x

36%

30%

31%

27%
22%

5x
4x

39%

20%

4.1x

4.0x

4.9x

4.6x

4.5x

3x

31%

28%

27%

27%

2x

22%

20%

10%

Debt/EBITDA

Cash/EBITDA; Cash/Debt

50%

5.0x

1x
7%

6%

6%

9%

9%

6%

8%

7%

7%

6%

5%

0%

0x

2005
2006
Source: Moodys Financial Metrics

2007

2008

2009

2010

2011

2012

2013

2014

LTM Q3-15

EXHIBIT 19

Median Interest Coverage North America Speculative Grade Issuers

EBITDA / Interest Expense

(EBITDA - CAPEX) / Interest Expense

Debt / EBITDA

6x

6x

4x

3.7x

3.7x

4.0x

4.3x

4.1x

4.0x

4.1x

4.5x

4.6x

5.0x
5x
4x

3x

3x

2x

2.1x

2x

2.1x
1.6x

1x
4.6x

4.3x

3.8x

1.7x

1.5x
3.2x

2.0x

3.1x

3.3x

1.8x
3.5x

1.7x
3.7x

3.4x

1.7x

1.7x

1.7x
3.5x

1x

Leverage of Debt-to-EBITDA

Interest Coverage

5x

4.9x

3.3x

0x

0x
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

LTM Q3-15

Source: Moodys Financial Metrics

21

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

APPENDIX D

22

LEVERAGED FINANCE INTEREST

22 FEBRUARY 2016

LEVERAGED FINANCE INTEREST EDITORIAL BOARD

Christina Padgett
Senior Vice President

Tom Marshella
Managing Director - US and Americas Corporates

John Puchalla
Senior Vice President

Alexandra Parker
Managing Director - Corporate Finance

David Keisman
Senior Vice President

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