Buyout firms eye portfolio debt buy-backs

The success of TDC, the Danish telecoms company backed by a buyout consortium, in deleveraging by buying its own debt at a discount, has tempted other firms to follow suit.

A number of leading private equity firms are looking at ways to buy back company debt to deleverage their portfolio companies at a discount using weak debt market conditions, according to two partners at Kirkland & Ellis.

Buyout firms are looking to benefit from terms in documents allowing their portfolio companies to buy debt from lenders. TDC, the Danish telecoms company bought by Kohlberg Kravis Roberts, Permira, The Blackstone Group and Apax Partners for €13 billion ($20.6 billion) in 2005, has shown the way. It recently bought €200 million of loans using the company balance sheet to buy back the debt at prices which have substantially fallen off since the credit crunch, using Deutsche Bank as a broker in the secondary market. It then extinguished the debt, deleveraging the company.

The other lenders in the syndicate are angry that the deleveraging of the company has come at the expense of the company’s balance sheet, according to a lawyer close to the banks.  The banks feel a rule has been broken, in that debt which is paid back early would normally be repaid at par across the syndicate.

This has caused the Loan Market Association to examine standard form documentation.

While the leveraged finance trade body examines the documents, numerous firms that signed highly leveraged deals in the bull market are looking at the documentation on their deals to see whether they can do the same.

Neel Sachdev, a partner at Kirkland, said: “It may not be permitted in some deals where there are restrictions in the covenants. Where the covenants permit the use of cash to acquire debt you can. We’ve been instructed by a number of clients to do this.”

There are, however, divisions between financial sponsor lawyers about the issue. “Some guy said to me it was contrary to the spirit of the terms. I returned to them and said I didn’t realise they had a spirit,” Sachdev said.

PAI  Partners has also reportedly bought back some of the debt linked to its acquisition of a roofing company owned by Lafarge, a global cement group, according to The Lawyer, the legal publication.

Even more firms are looking at conservative structures such as side-car vehicles, investing from their own funds to buy debt in portfolio companies, according to Stephen Gillespie, another partner at Kirkland. This is less controversial as it potentially delevers the company without using its own balance sheet, he said.

Numerous firms have bought debt in companies they own directly from their fund, or indirectly as they look to acquire hung debt from the banks. Recent transactions realised by buyout firms directly from banks include the acquisition of $12.5 billion (€7.9 billion) of debt Citi by a consortium of buyout firms, in a transaction which will likely see the firms own debt related to their own deals.