September 16, 2019 / 10:51 AM / 3 months ago

PE-owned firms strain as loans lose value

LONDON, Sept 16 (LPC) - Private equity firms are facing more portfolio challenges in Europe as retail and cyclical companies remain under pressure, but BC Partners has more than its share of problem credits that are attracting attention from distressed investors.

The secondary loan value of some European companies owned by BC Partners have fallen heavily since the start of the year, although the private equity firm’s overall returns are supported by some big wins.

“There are some tricky leveraged loans out there for most sponsors but BC Partners seem to have a disproportional amount,” a head of capital markets banking said.

London-based BC Partners specialises in buyouts and acquisition financing in upper middle market European and US companies and is looking to raise a new flagship multi-billion pound fund next year.

German managed hosting provider PlusServer’s loans have nearly halved in value and were quoted at 50% of face value on September 11, according to LPC data, down from 92.25% at the end of 2018.

Other BC Partners-owned companies including Dutch flower grower Dummen Orange and Irish online car rental company CarTrawler’s loans have also been under pressure recently.

Dummen Orange’s loans were quoted at 61% this month, down from 80% in late 2018 and CarTrawler’s loans were quoted at 84% of face value on September 12, down from 99.25% in the same period.

These loans are drawing attention from distressed investors scouting potential restructuring situations, as retail companies battle online vendors and cyclical companies struggle.

Europe’s top 40 leveraged loans are trading at an average 98.7%, up from 97.35% at the start of the year, but some sectors are still trading well below par, with retail at 93.10%, general manufacturing at 91.24% and construction at 71.98%.

Spanish bridal wear designer Pronovias’s loans were quoted at 89.96% in September, down from 94.5% at the end of 2018 and Israeli furniture maker Keter’s loans are still trading at a significant discount at 85.33%, despite rising from 78.39% in late 2018. Both companies are owned by BC Partners.

The common theme appears to be poor performance in over-leveraged companies against a weakening economic backdrop, but some investors are also questioning how the companies are being managed.

Despite problems in its European portfolio, BC Partners’ overall returns are being held up by some strongly performing companies, including German industrial ceramics group Ceramtec and US animal products retailer PetSmart.

“BC Partners has had some massive home runs, such as PetSmart, but several European deals are not performing well,” a global head of leveraged finance said.

EXPANSION

Blackstone Alternative Asset Management invested around €500m for a 15%-20% stake in BC Partners in August.

BC Partners said at the time that the move would provide it with increased balance sheet capital to further invest in its business and expand its capabilities.

WARNING SIGN

Some private equity firms earned negative reputations in the financial crisis of 2008 with lenders due to their reluctance to support portfolio companies and an aggressive approach with investors.

Charterhouse Capital Partners lost control of portfolio companies including French retailer Vivarte and UK hygiene services provider PHS in painful debt-for-equity swaps in 2014, which brought losses for lenders.

Lenders and investors are closely monitoring how BC Partners will deal with these situations, and whether the private equity firm will offer support or walk away if businesses are deemed to be unprofitable.

“BC Partners is on a really bad run at the moment. Quite a few deals are troublesome and it remains to be seen exactly how they behave as it will determine how much people work with them,” a second capital markets head said. “People are asking if they are still a top-tier sponsor.”

Questions are also being asked about BC Partners in banks’ credit committees, particularly about potential new covenant-lite loans with loose documentation.

“BC hasn’t had to come together with lenders yet, so the test of their mettle is yet to come,” the first capital markets head said.

With little protection thanks to the proliferation of cov-lite loans, investors have limited recourse as long as companies continue to pay the interest margins on their loans, even if sales and performance are sinking.

“Companies with covenant-lite loans just need to cover their interest. The risk is that they become zombies for a few years and the sponsor has a free hand to do what they want,” a syndicate head said.

The upside of cov-lite loans for private equity firms is that they have breathing space to manage portfolio companies out of problems, or ride economic and commodity cycles without pressure from lenders. (Editing by Tessa Walsh)

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