February 17, 2012 / 3:55 PM / 7 years ago

RLPC-Private equity forced to find more cash for ailing firms

* 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 (Reuters) - 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 difficult task.

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 deteriorate.

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 companies.

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 investor.

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 said.

“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.


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 assumptions.

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 earnings.

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