* LBO companies see rise of loan covenant breaches
* Lenders demand cash from private equity firms
* Some PE firms to hand distressed businesses to lenders
By Isabell Witt
LONDON, Feb 17 Private equity firms are
having to dig deep to inject hundreds of millions of euros into
the companies they own or risk losing them as Europe's economic
slowdown puts pressure on corporate earnings.
Buyout firms, which raise funds from wealthy investors to
buy companies, face the tough choice of putting more cash into
these struggling businesses in the form of fresh equity or
buying back their debts, or handing the keys to the lenders.
"The options for PE firms now are to show the money or say
good-bye honey", a senior restructuring banker said.
"Private equity in Europe is looking at dire times. There is
no real growth in Europe and companies can't put in more debt
like they used to prior to the downturn," the senior
restructuring banker said.
Traditionally, private equity companies buy a business in
hopes they can make a profit via a sale or stock market
flotation a few years down the road.
But the tough economic climate has made this a more
European private equity-backed firms need to refinance
almost $60 billion of loans that mature before the end of 2013,
according to Thomson Reuters LPC data, a task that will become
increasingly challenging if company performance continues to
Banks that have lent money for these so-called leveraged
buyout deals are currently more focused on preserving their own
capital because of tougher regulatory requirements and fallout
from the euro zone crisis.
They are demanding tougher terms to 'amend and pretend'
billions of euros of private equity loans, a process which gives
the borrower more time to repay.
Banks used to be happy to push to problem down the road, but
now liquidity is tight they are calling on private equity firms
to provide more support by injecting fresh cash into their
Private-equity-owned German plastic films group Kloeckner
Pentaplast and gym chain Fitness First, have already breached
loan covenants and are heading towards restructuring, showing
the impact of Europe's lower growth environment.
U.S. private equity firm Blackstone Group risks
losing its 2007 investment in Kloeckner Pentaplast, which told
lenders this week about the breach of covenants on its 1.25
billion euro ($1.63 billion) debt pile.
Blackstone may chose not to inject more cash into the
business and hand the keys to lenders, which include U.S.
distressed debt investment funds Oaktree Capital and Strategic
Value Partners, which specialises debt for equity swaps.
"It's going to be an interesting dynamic, whether [private
equity firms] keep the companies or let them go," said one
Fitness First has also breached its loan covenants and
private equity firm BC Partners is looking at options to
restructure the 600 million pounds in loans it raised in 2005 to
buy the gym chain.
BC Partners tried to sell Fitness First and
refinance its debt last year but efforts failed due to market
volatility related to the eurozone crisis.
Private equity firms have some room for manoeuvre as they
usually leave capacity in funds for extra investments, but it is
difficult for them to support companies where the cash injection
required is greater than the amount they have allowed, investors
"Private equity firms usually invest 90 percent of a fund
and keep 10 percent for follow-on investments. If it is more
than that it is very hard to justify using subsequent funds to
support earlier," a senior loan portfolio manager said.
RECENT BUYOUTS STRUGGLE
It is mainly companies bought at the peak of the leveraged
buyout boom (LBO) boom that are in distressed investors' sights,
but several buyouts that took place after the financial crisis
have also moved into the danger zone.
Private equity firms and lenders overestimated the economic
recovery when buyout activity restarted in late 2009. Some
private equity firms paid high prices to buy companies in 'new
generation' buyouts, based on over optimistic economic
Apax Partners, for example, has to stump up at
least 50 million pounds of cash for British medical courier
Marken or loose the company after it breached loan covenants.
Marken was one of the first buyouts to be completed in 2009
when the market restarted after Lehman Brothers' collapse in
2008. Apax was viewed as having overpaid for Marken, after
making a last-minute bid to trump rival Hellman & Friedman.
Apax has also had to inject 60 million euros of equity into
German fashion retailer Takko in December 2011 less than 12
months after it bought the business, in order to get lenders to
agree to reset loan covenants after a drop in the company's