In a headlock

A private equity firm is trying to force the portfolio company of a rival investor into Chapter 11. It's a risky move

TowerBrook Capital Partners, the New York- and London-based private equity firm, recently launched a manoeuvre to try and force a company backed by Chicago-based GTCR Golder Rauner into bankruptcy. Experts say the audacious move could end up backfiring on TowerBrook by exposing it to penalties.

TowerBrook and Deutsche Bank filed an involuntary Chapter 11 petition against Wilton Holdings, which makes equipment for decorating foods. A TowerBrook affiliate, JGF Credit, holds a $104 million unsecured claim against the company, representing debt it acquired this year. Deutsche Bank, which also is owed $104 million, joined the TowerBrook petition.

TowerBrook did not acquire the debt for the purposes of putting the company into bankruptcy, according to a Standard & Poor's report on Wilton.

GTCR bought Wilton and scrapbook and paper craft company Dimension Holdings for approximately $1 billion in 2007, including $200 million in equity and $800 million in debt. Martha Stewart Living Omnimedia co-invested with GTCR, committing $10 million in equity.

An involuntary bankruptcy petition can be a risky move because the firm filing the petition may be hit with punitive damages if it's rejected, according to Martin Bienenstock, chair of law firm Dewey LeBoeuf's business solutions and governance department.

“Additionally, the petitioners are sometimes ordered to post a bond to protect the debtor against the consequences of a wrongful involuntary petition,” Bienenstock says.

Once the petition is filed, the target company receives the protection of the bankruptcy code's automatic stay provision, preventing creditors from seizing assets to cure their claims, Bienenstock says.

In the period between the filing of the petition and the final ruling on whether to allow the involuntary bankruptcy filing, the target company is allowed to operate as it always has, without any kind of notice or authorisation from the court, while still enjoying the protections of the automatic stay.

“Once the petition is filed, no creditor can take enforcement action against the debtor, but the debtor is not restricted in its actions unless and until the petition is sustained,” Bienenstock says. “For a time, an involuntary petition gives the debtor the benefits of bankruptcy (i.e. creditors can't sue it) without some of the burdens.”

TowerBrook has provided no explanation for its bankruptcy move in court documents, and the firm declined to comment to PEI. GTCR and Wilton also declined to comment. It remains to be seen how this battle will play out now the opening shot has been fired. The strategy may however be working out for TowerBrook. Just before going to press, the firm reached an agreement with Wilton and GTCR to “stand still” with its involuntary bankruptcy filing against Wilton while the parties iron out the details of a financial restructuring of Wilton.