OREANDA-NEWS. S&P Global Ratings today said it lowered its issuer credit rating on Sterling Mid-Holdings Ltd. to 'SD' (selective default) from 'CC' and lowered the ratings on the senior notes to 'D' (default) from 'C'.

"The rating action follows Sterling's completion of its exchange offer for DFC Finance Corp.'s existing senior secured notes," said S&P Global Ratings credit analyst Gaurav Parikh. "The company exchanged 92.4%, or $739.3 million, of its outstanding 10.5% senior notes due in 2020 for 12% PIK toggle notes due in 2020." Of such principal amount, $225.2 million was tendered by its private-equity owner, Lone Star Funds. Under new terms, LoneStar is expected to buy back at least $50 million of aggregate principal, of which $30 million has been repurchased, either through open-market transactions or tender offer over the next few months. If LoneStar fails to buy back debt, the consenting bondholders are required to tender their holdings at 0.65/dollar, which is currently above the market price

Additionally, according to the contribution commitment letter, over the next two years, LoneStar must inject $75 million of equity into Sterling, of which at least $20 million must be made each year. If the sponsor fails to make these contributions, it is required to deliver an evergreen irrevocable letter of credit for the deficit. According to the turnover agreement, in an event of bankruptcy, LoneStar will bear the first loss on $50 million of the new notes. Sterling expects to make cash interest payments of about 1% on its new notes (11% PIK) and full interest payments at 10.50% on its existing senior notes.

Following the exchange offer, the company will have about $60.7 million of senior notes outstanding. Recently, the company borrowed an extra $40 million by drawing an additional $10 million on its securitization facility for a total outstanding balance of $110 million. The remaining $30 million was injected by LoneStar through $21 million in equity and $9 million in notes payable on demand.

We look to raise the issuer credit rating and issue rating on the senior notes from 'SD' and 'D', respectively, in as early as one business day. Over the next two years, we expect the company to PIK its interest, which will improve its existing cash interest coverage ratio to above 0.5x. While improved, the ratio still points to the unsustainability of the situation for Sterling absent future equity injections from LoneStar. Over the longer term, the debt obligations on the new notes are expected to increase above $900 million, at which point the company will have to pay cash interest unless it further restructures its capital structure.