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Fitch: American Tire bankruptcy poses little risk to CLO debtholders

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The Chapter 11 bankruptcy filing Thursday by American Tire Distributors is not going to have much impact on the income streams of the collateralized loan obligations that hold portions of its $720 million senior secured term loan, Fitch Ratings reported Thursday.

Besides being well buffered from a single-loan exposure, CLO managers have also had several months to prepare for American Tire’s expected filing with the news this spring that the Huntsville, N.C., company had lost its two primary manufacturer relationships with Goodyear and Bridgestone.

The loan issued in March 2015 (with a $696 million remaining balance) was held by 16% of broadly syndicated CLOs during September, as tracked by Fitch, with an average exposure of 0.35% in their portfolios – well under the average senior overcollateralization cushion of 11.6% and junior OC cushion of 5.3% that covers interruptions of payment streams from a defaulted obligor.

The combined exposure last month totaled $71 million, down from $230 million in April when 24% of Fitch-rated CLOs held the loan.

“Most CLOs are not in immediate danger of shutting down equity distributions,” Fitch’s report stated.

Under CLO structures, a defaulted loan required a haircut to a CLO’s par amount and is restated at the lesser of a rating agency’s collateral value or its market value, Fitch’s report stated. Most CLOs had to remove American Tire from its roster of current-pay oligors once S&P downgraded the company’s corporate rating to SD (selective default) on Sept. 5. (Some CLOs, however, had indenture agreements in place allowing them to maintain the loan as a current-pay obligation, according to Fitch.)

Managers began cutting their exposure after the Goodyear and Bridgestone defections from its supply channels, and Fitch had placed the loan among its “loans of concern” in May.

On Thursday, both S&P Global Ratings and Moody’s Investors Service downgraded the American Tire loan. S&P issued a new D default rating on the term loan, lowering it from CCC-, as it also lowered the SD corporate rating to D. The actions followed two other corporate downgrades that began last October as the company’s high leverage levels (estimated at 8x EBITDA by S&P) remained elevated.

Moody’s, meanwhile, lowered its rating on ATD's secured loan to Caa2 from Caa1, and is expected to withdraw all ratings for the firm due to the bankruptcy filing. Moody’s had originally signed a B2 rating to the loan when issued, but in April 2016 lowered the company’s corporate and secured debt rating to B3 due to weaker-than-expected sales and earnings in 2015. The loan and debt were further downgraded to C-status after the termination of the supplier arrangements were announced.

There is the possibility senior lenders may salvage the loan through the reorganization plan, preserving CLOs' position in full.

According to Bloomberg, the company has reached a restructuring plan with its bondholder class to continue operations with new financing and access to its current $980 million revolving credit facility. The bondholders will in exchange take a 95% stake in the privately held company from American Tire’s current sponsors, TPG Capital and Ares Management. TPG and Ares will retain the other 5%.

That settlement does not include senior lenders, who the company stated in court filing are seeking “excessive value” for the loan, according to Bloomberg. Without a resolution, the company’s reorganization plan will reinstate the existing terms on the loan, reports stated.

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