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Make the first move

Most portfolios have at least one struggling business. It’s up to GPs to instigate a restructuring process before the banks have to step in, writes Toby Mitchenall.

While many businesses were shutting down for Christmas and New Year, some were shutting down for good. UK retailers in particular were being picked off during the holiday season like hot mince pies.

If shoppers couldn’t find any bargains among the few remaining items on Woolworth’s shelves, they could pick up the shelves themselves at a discount. Meanwhile across the high street children’s clothes retailer Adams, tea and coffee retailer Whittards of Chelsea, The Officers Club – another clothing retailer – and music store Zavvi all called in the administrators. French fashion retailer Morgan filed for bankruptcy protection on Christmas Eve.

Toby Mitchenall

While only one of the above high profile European failures – Morgan is 40 percent owned by Apax Partners – was private equity backed, the news flow coming out of the sector indicates just how hard conditions have become for all businesses.

In the US, December saw both JF Lehman & Co’s Special Devices, an auto parts supplier, and Prentice Capital Management’s toy retailer, KB Toys, both filed for Chapter 11.

“There is no shame in this environment in having an underperforming company. Everyone will have one in their portfolio,” said Close Brothers managing director Simon Tilley, who heads the firm’s European financial sponsors group.

One such underperforming company would be Thule, a Sweden-based manufacturer of car roof boxes. Private equity sponsor Nordic Capital, which bought Thule from Candover for €710 million in 2007, recently undertook a protracted financial restructuring for the company.

Following the negotiations, the seven lending banks agreed to convert a portion of senior debt into equity, while Nordic made an undisclosed injection of fresh capital. Thule remains under the majority ownership of Nordic and its annual debt repayments have been reduced by around 45 percent.

Elsewhere in the private equity industry, BC Partners is reportedly working to restructure the debt on UK-based estate agency Foxtons. Paris-based PAI Partners is renegotiating the debt on two portfolio companies: housebuilder Kaufman & Broad and roofing company Monier.  GI Partners’ is currently doing the same for portfolio company The Orchid Group, a UK pub and restaurant operator.

With the proliferation of covenant lite structures during the credit bubble, many firms can now continue operating underperforming portfolio companies without being forced to address potential covenant breaches.

“If you are the possessor of a strongly leveraged company with nothing in the equity layer, you have little interest in the business because your money is gone. The company will stagger on for a long period of time,” Alchemy Partners founder Jon Moulton told PEO.

Without any legal obligation to meet their lenders often until it is too late, the onus falls on private equity backers to instigate restructuring processes. While it may be a painful step to take, it will certainly hurt less now than it will 12 months down the line.

“Financial sponsors have to take the lead,” said Tilley, “because the cov-lite structures will either trigger a renegotiation too late or not at all.”