LBO France hands Terreal keys to lenders

Restructurings in France are seldom easy, but Park Square and ING managed to achieve consensus amongst fellow lenders, shareholders and management.

French building materials group Terreal has undergone a restructuring that sees control of the business pass from private equity owner LBO France to lenders led by ING and private debt fund manager Park Square Capital.

Park Square is Terreal's largest institutional lender, and its second largest lender after ING. As part of the restructuring agreement, Terreal's lenders will convert a significant portion of debt into equity and become significant shareholders in the business. The company's management team will remain shareholders in the business through a restructured incentive plan.

LBO France, which acquired the business from fellow private equity firms The Carlyle Group and Eurazeo in 2005 for €860 million, has seen its equity position wiped out. The firm declined to comment.

LBO France made its investment in the business from its sixth European mid-market buyout fund, White Knight VI. The firm had anticipated this outcome, and its investors had been made aware of the situation some time ago, according to a source with knowledge of the situation. Despite the loss, White Knight VI is understood to have delivered a return in the region of 2-2.5x to date with an IRR of about 60 percent, the source said.

In 2007, LBO France recouped 40 percent of its equity investment in the business following a dividend recapitalisation. Yet following the onset of the credit crisis, a restructuring proved necessary in 2009. No new money was required, but the plan put in place was based on the hypothesis that the economy would recover. Despite an uptick in late 2009 and 2010, by mid 2011 the double-dip recession in France had taken hold and it became apparent that the company's capital structure was no longer sustainable, a source said.

Gross debt has been reduced from €486 million to €300 million (or €230 million net of cash). ORAs (junior PIK notes redeemable in shares) were reduced from €550 million to €157.5 million, and the maturity of remaining debt has been extended by three years. Interest expenses are expected to reduce by €7 million per annum.

There were three key objectives for the restructuring, according to the statement. The first was to achieve financial stability through reduced leverage and interest costs, thereby proving to customers it had a sustainable capital structure. The second was to achieve operational flexibility through long-dated debt maturity, no debt amortisation, and a covenant holiday, allowing the company time to return to a growth trajectory and profitability based on a cyclical recovery in the building industry. Lastly, the company's governance structure has been improved, with independent directors brought in to provide industrial, financial and commercial expertise.

Park Square built a position in Terreal through a number of heavily discounted purchases of its debt over several years, it said. In doing so, it built a “strong relationship with management and the syndicate of senior lenders” which helped it to facilitate the restructuring.

Park Square founder and managing partner Robin Doumar commented: “Lender-led transactions are rare in France, due to the unanimous agreement required from lenders, sponsors and management; however, Park Square’s long-standing knowledge of Terreal and its management facilitated this consensual approach. We see lender-led restructurings as being efficient and beneficial for all parties, and we intend to increase our focus on this type of transaction in the years to come, in order to replicate the positive outcome with other special situations.”