Last week amid everything else a potentially significant test case came to an inconclusive end in London’s High Court. Guy Hands’ Terra Firma and RREEF, a fund owned by Deustche Bank, apparently relented on their attempts to prevent UBS selling on debt from their buyout of German service station operator Autobahn Tank & Rast.
As the borrower, Tank & Rast has the right to refuse the sale of one of its loans to a third party, providing it has legitimate reasons. In February it blocked two planned sales by UBS totalling €40 million ($58 million) to Australian infrastructure investor Macquarie and JPMorgan Infrastructure Investments Fund.
In May UBS filed a complaint against the two business owners in London’s High Court, suggesting the sales had been blocked for “invalid and illegitimate reasons” and seeking compensation and an injunction to allow the sales of the buyout debt to go ahead.
European bankers and financial sponsors were no doubt keeping one eye on this process, representing as it did a potential test case for banks trying to rid themselves of pre-credit crunch LBO debt.
According to Standard & Poor’s, banks are still holding around $48 billion in unsold LBO debt – a significant sum even if it is a long way off the $325 billion held at the height of the crunch.
That Tank & Rast has concerns over where its debt ends up is understandable; it does not want to find itself lumbered with a particularly aggressive lender in its capital structure. Or worse still a competitor.
As it happened, on what was to be the first day of the trial, UBS lawyer Adrain Beltrami announced that both parties had “reached commercial terms” on a settlement. All parties involved refused to comment on the details of the settlement, but sources close to the matter told the Financial Times that part of the settlement involved Tank & Rast agreeing to let the sales go through.
Many will applaud such an outcome, as shifting old LBO debt is already hard for banks without a new legal precedent empowering borrowers to block sales.
Lehman Brothers provides a poignant illustration of how difficult it is: One of the steps on its road to bankruptcy earlier this month was the reported cancellation of an auction of $852 million of loans amid tumbling leveraged debt prices.
Ironically, while it is a Deutsche fund seeking to block the sale of buyout debt in the Tank & Rast case, the German bank knows as well as anyone the difficulty involved in selling it on. Earlier this month it only managed to shift $228 million of a hoped-for $980 million of Clear Channel Communications bonds following the company’s buyout. That was at 70 cents on the dollar.
Given the speed at which banks are either disappearing, nationalising or being gobbled up by competitors, it is a good thing that their ability to offload risky debt is not being further impeded.
And let us not forget the other benefactors of a leveraged debt market with fewer legal barriers to trade. Private equity investors, like Apollo Global Management and The Blackstone Group’s GSO Capital, have found an excellent substitute for traditional buyouts in the acquisition of debt. In August the two buyers acquired around $13 billion in leveraged loans over two separate transactions.
So in the Tank & Rast case, it would seem, no news is good news.