Termsheet – Klöckner Pentaplast

Germany’s mittelstand has traditionally been largely resistant to private equity’s charms. But there’s always an exception: plastics manufacturer Klöckner Pentaplast has spent the last 12 years under private equity ownership, having gone through two successive leveraged buyouts. Each piled on increasing amounts of debt.

It’s little wonder then that the business finally buckled last year in what was a rare reverse for global behemoth The Blackstone Group, its second private equity owner. Economic conditions (apart from the financial crisis, oil price spikes also had a serious impact) played a part of course, but most observers agree it was over-gearing that led to it breaching covenants last year.

The beneficiary? Loan-to-own specialist Strategic Value Partners, which last month recouped its investment in the business following a PIK-based refinancing.

Charting Klöckner’s decline isn’t easy, not least because on the face of it, the company’s performance has been relatively healthy.

Cinven and JPMorgan Partners acquired Klöckner in 2001 in a deal valued at about €500 million. Growth under their ownership was strong, and saw the business open plants in Brazil, Norway and the Netherlands. It later expanded into Russia, India, Australia and China, making it a truly global business.

When Blackstone acquired the company in a secondary buyout from Cinven in mid-2007, eyebrows were raised. First, there was what some considered an inflated price tag: €1.3 billion. Second, the leverage used was excessive, even by pre-Lehman standards. At 7.3x the company’s EBITDA, the debt used to underpin the deal would come back to haunt Blackstone. The only silver lining when it came to hand over the keys almost five years later was that Blackstone’s equity exposure to the business was just €220 million. Cinven timed its exit perfectly, netting a healthy 2.2x return on the deal.

“Klöckner was already highly leveraged before Blackstone stepped in,” Standard & Poor’s Ratings analyst Rachel Lion tells Private Debt Investor. “The company relies on both stable and cyclical markets – and simply was unable to endure the weight of the leverage. Also, market conditions remained unfavourable.”

Having rated it as B- at the time of the Blackstone acquisition, S&P’s downgraded Klöckner’s debt at the start of 2012 to C+. By then, it had begun to draw the attention of distressed debt investors Oaktree Capital Management and Strategic Value Partners (SVP).

“While the business tried everything in its power to avoid it, Klöckner broke covenants,” says Victor Khosla, SVP’s founder and chief investment officer. “Given the level of leverage on the company it had always been likely to occur and fluctuations in currency in that year ultimately played a role as well.”

SVP led a group of investors who recapitalised Klöckner’s capital structure in June last year, having previously bought up significant amounts of its senior debt.

The syndicate injected €190 million of equity into the business, whilst new debt facilities were underwritten and funded by Jefferies & Company. The deal repaid €800 million in first lien senior secured loans at par plus accrued interest, Klöckner revealed at the time, as well as equitising second lien and mezzanine positions.

The restructuring reduced total debt on Klöckner’s balance sheet by almost 50 percent from €1.26 billion to €630 million. And Blackstone handed over the keys to SVP and its fellow investors.

Yet that outcome wasn’t always on the cards. Blackstone and Oaktree had reportedly been in negotiations over an alternative plan which would have effectively wiped out lower-ranked creditors (including SVP), leaving the pair with a combined majority holding.

SVP managed to forestall that process however, by playing hardball. It is understood that SVP brought in litigation boutique Quinn Emanuel. “The firm threatened legal action to avoid being wiped out in a restructuring,” one London-based lawyer revealed. 

“It’s a fairly aggressive approach but very common when junior lenders are in a tight situation,” said Clive Zietman, partner and head of commercial litigation at Stewarts Law. “Increasingly, particularly in the case of deals involving large sums, junior debt holders are using litigation as bargaining chip to gain control of the company.”

Blackstone’s deal with Oaktree is understood to have collapsed at a creditor’s meeting in May last year, after which Klöckner’s junior lenders, led by SVP, tabled an alternative restructuring plan that was soon accepted.

Khosla described the restructuring as “ground-breaking here in Europe – while it happens in North America, junior lenders using the capital markets to re-pay the senior lenders at par and then take ownership of the business is unusual here.”

Less than a year on, SVP has recouped its investment through a PIK-based refinancing after 10 months of strong performance by the company. In the 12 months to December 2012, net debt in Kleopatra Holdings 1, Klöckner’s holdco, stood at 4.6x – a far cry from the 7.3x at the time of Blackstone’s acquisition.

Performance was sufficiently encouraging for SVP to refinance Klöckner’s debt by issuing €225 million-worth of senior PIK notes last month. The issue target was twice increased, initially by €50 million to €200 million and then by a further €25 million. The notes are due to mature in August 2017 and are structurally subordinate to secured credit and notes on Klöckner’s balance sheet. The PIKs had a toggle, and bore interest at 10.25 percent cash or 11 percent PIK, to be paid semi-annually according to Klöckner. Jefferies and Goldman Sachs were joint bookrunners for the issue.

About €139 million of the proceeds from the PIK issue were used to partly repay €270 million outstanding under preferred equity certificates issued during the 2012 restructuring, according to data provider Debtwire.

“The refinancing allows us to return significant capital to investors in less than a year and ensures that the company is well positioned to deliver on its strong prospects both in its current markets and as it expands into newer emerging markets,” added Khosla, speaking at the time of the PIK issue.

Things then are looking up for Klöckner and its new owners. It’s been a trying time for the business, but with a much-reduced debt load (although by no means insubstantial) and small incremental gains in profitability, its health looks far more assured. For SVP and its fellow debt investors, the deal has been a shining example of what can be achieved with canny investing and aggressive negotiating.   

Timeline

1965 – German plastic manufacturer Klöckner Pentaplast is founded.

1980 – Klöckner opens plants in the US and Canada.

1999 – Klöckner grows opens further production plants in nine countries, including Argentina, Spain, Switzerland, UK, Thailand and Portugal.

2001– European private equity firm Cinven and its minority partner, JPMorgan Partners (CCMP Capital Advisors), acquires Klöckner for €500m.

2003 –  Klöckner opens plant in Brazil, Norway and Netherlands.

2006 –  Klöckner Pentaplast expands into Russia, India, Australia & China.

2007 (May) – Blackstone buys Klöckner for €1.3 billion.

2008 (March) – S&P’s downgrades Klöckner’s debt to C-.

2008 (July) – Klöckner buys back €25 million mezzanine debt in a bid to reduce leverage.

2010 (February) – Klöckner buys back more mezzanine debt.

2012 (March) – Oaktree Capital, SVP, and Blackstone square up a battle for control  of Klöckner.

2012 (May) – SVP wins vote to lead restructuring.

2012 (June) – SVP puts forward a rival bid for Klöckner that would wipe out the ownership of Blackstone.

2012 (July) – SVP announces “successful restructuring.”

2012 (August) – S&P upgrades Klöckner Pentaplast to ‘B-‘

2013 (May) – SVP recoups its investment in Klöckner by issuing €220 million-worth of PIK notes.