RLPC-KKR's Selecta PIK boosts high risk, high reward assets

LONDON, June 26 Thu Jun 26, 2014 9:23am EDT

LONDON, June 26 (Reuters) - Struggling Swiss vending machine business Selecta's prospects are brightening after a 220 million euro ($299.94 million) PIK loan from KKR. The deal is the latest investment for the private equity firm's $3.8 billion special situations fund and boosts its portfolio of high risk and high reward assets.

KKR's PIK loan is a deeply subordinated equity-like instrument. At nearly half of the value of Selecta's business, the PIK will allow KKR to make substantial gains, particularly if the company is sold in three to five years.

Although the PIK loan comes at a high price for Selecta's owner, Allianz Capital Partners (ACP), which is paying around 18 percent, it helps Selecta to avoid a debt restructuring and helps ACP to keep a stake in the company.

KKR's investment in Selecta follows a similar 350 million euro quasi-equity PIK loan for Swedish mattress maker Hilding Anders last September.

Selecta and Hilding Anders' loans were trading at distressed levels after attempts to sell the companies failed and both were struggling to refinance existing debt. Selecta completed a high-yield bond after KKR's investment and the secondary price of Hilding Anders' extended loans has improved.

Unlike other direct lenders, KKR has a high appetite for risk and is willing to invest large amounts of money far down capital structures in return for higher yields.

"Companies in need of capital usually approach their existing relationship banks or the capital markets before approaching us - we are not necessarily the first option they consider but we do provide a differentiated and alternative source of funding," said Mark Brown, a London-based Director of KKR Asset Management.

GLOBAL SEARCH

KKR's $3.8 billion special situation fund closed in December 2013 and is investing in deals globally. It has a minimum investment of around $150 million and targets returns in the high teens. Other direct lenders are looking for returns of 5-12 percent on senior secured, mezzanine or unitranche financing.

KKR is more able to follow a higher risk strategy due to its private equity roots which helps it to implement turnaround strategies, along with its large size and scale.

"Our approach is different to other direct lenders driven by our return requirement and by having a very flexible pool of capital. We are looking to bring a private equity approach to direct lending situations which allows us to get more operationally involved and have a greater say in corporate governance," Brown said.

Taking proprietary ideas to companies is paying off. KKR was familiar with Selecta's business after giving 100 million euros to Italian vending machine company Gruppo Argenta in January 2014.

KKR also invested 320 million euros in Spanish building materials company Uralita's insulation division, URSA, which refinanced existing debt. It also bought France's Winoa Group, formerly known as Wheelabrator Allevard, in a deal which cut the company's debt by 45 percent and injected 60 million euros of fresh equity.

"We have the infrastructure to execute these direct lending deals as we have the origination capabilities, people developing relationships on the ground and sector expertise. Most deals are complicated and have a long lead time. Typically we are taking a three to five year view on the company's fundamentals which means the positions are usually illiquid," Brown said.

BIG RETURNS

Although the high-yield bond market is more competitive as it becomes more receptive to refinancing lower-rated distressed loans, KKR has carved out a niche at the riskier end of direct lending, which will pay off handsomely if its portfolio companies' fortunes turn around.

"A lot of the companies that KKR targets are in a lot of trouble and this is real rescue financing, it is almost like a fresh equity injection. Most direct lenders provide senior secured - almost substitute bank facilities - whereas KKR is distressed debt investing," a leveraged finance banker said.

"If KKR targets the right companies, it's a great investment opportunity," the banker said.

ACP bought Selecta in 2007 for 772.5 million pounds ($1.31 billion) backed by 690 million pounds of loans. Attempts to sell the business in 2012 failed and ACP pulled the sale after failing to find a buyer willing to meet its asking price.

KKR's new investment in Selecta sits alongside a new high yield bond split between a 350 million euro tranche and a 245 million Swiss franc ($274.63 million) tranche.

KKR is providing alternative capital and targeting consensual partnerships with shareholders, management and lenders, but the private equity firm is also able to go it alone.

"We are an alternative to banks having to fund companies but will also partner up with banks to help refinance existing capital structures. There are however situations where existing lenders want out and we are able to provide the entire capital structure as required," Brown said. ($1 = 0.7335 Euros) ($1 = 0.5889 British Pounds) ($1 = 0.8921 Swiss Francs) (Editing by Tessa Walsh)