Termsheet: Construction complexity

“The European building materials sector was on its knees. No-one wanted to touch Spain 12 months ago. So it was a very contrarian play for us at the time,” says Mubashir Mukadam, KKR Asset Management’s head of European special situations, with no small degree of understatement.

The contrarian play in question was a €320 million loan extended to struggling Spanish construction materials group Uralita. It represented KKR’s biggest rescue refinancing deal in Europe.

Uralita was a classic case of a good company against which macroeconomic headwinds and an entirely unsuitable capital structure had conspired to bring about its downfall.

Its balance sheet made unpleasant reading. Declining profitability and rising interest payments on its significant debt burden meant that as 2013 approached, a restructuring of some sort was all but inevitable.

EBITDA had more than halved from €103 million for the full year 2009 to €48 million in the 12 months to 31 March 2013 (the last year full year figure available was 2012, when EBITDA was €56 million), according to Debtwire. The company’s net leverage, meanwhile, had risen from 2.2x to 5.3x over the same period.

As of 29 April 2013, the company’s debt structure comprised a €120 million syndicated loan, maturing in March 2014, of which €84 million remained outstanding. It was paying interest at Euribor plus 4.5 percent. Two bonds (one $129 million tranche, the second a $23 million tranche), issued via a private placement, were also due to mature this month. They were both paying 8.61 percent interest, and had €123 million outstanding as of 29 April 2013.

Finally, the company had €27.7 million in banks loans and €48 million of other credit facilities. Uralita had already conducted an ‘amend and extend’ for the loans and bonds in 2012, pushing out maturity to 2014, but as part of that deal it had agreed to secure alternative sources of financing by that maturity date.

All told, that amounted to €276 million of total bank debt, equivalent to 4.92x leverage. Less cash and cash equivalents of €24 million, net bank debt amounted to €252 million with a leverage multiple of 4.5x.

Against this backdrop, it seemed contrarian in the extreme to invest in the business. KKR thought otherwise.

“We felt it was a very good company with an inappropriate capital structure,” explains Mukadam. “There were some very aggressive hedge funds in the debt, threatening the company. There was a pressing need for liquidity. We had previously looked at the business on the private equity side and knew the [building materials] sector well.”

Speed was paramount, and in this regard KKR was well equipped to deliver a solution. The firm has been a fixture of the European market for 17 years and has entrenched relationships with lenders and sponsors across the continent. The European special situations group can also call on the wider KKR network for assistance, which in this case proved essential.

“Uralita was a complex deal done under a huge amount of time pressure,” Mukadam admits. “It was a deal where the collective strength of KKR was brought to bear – we had colleagues from the private equity group in Spain and Capstone working alongside us and [head of European corporate affairs] Ludo [Bammens].”

Within six weeks of getting involved, KKR was able to provide interim liquidity until a full refinancing could be achieved.

That full refinancing duly followed after some fierce negotiations with the company’s existing lenders, some of whom – the US hedge funds in particular – were reluctant to accept the proposals.

The banks however, were more amenable, perhaps surprisingly so.

“It was, we think, the first time [post-credit crisis] that banks in Spain had agreed to take a modest discount in such a scenario,” Mukadam says. “The Spanish banks were acquiescent to our proposals. Morgan Stanley, who advised on the deal, did a great job. The US funds were more difficult but ultimately accepted the outcome.

“Kudos is certainly due to the main shareholder of Uralita, Javier Serratosa, who understood what was needed and what we had put on the table,” he adds.

The rescue loan

The deal announced on 29 April last year saw KKR provide a €320 million, seven year bullet rescue loan to the company with which Uralita could refinance all its existing debt. The company repaid €280 million of the loans and bonds that were due to mature in 2014, and set aside €40 million to fund the international expansion of its profitable insulation business, URSA, against which the loan was secured.

The loan essentially gave Uralita time, both to wait for a market upturn and to develop its more profitable business lines.

It raised the company’s pro forma leverage from 4.92x (as at the end of December 2012) to 6.67x, however, while the additional interest payments impacted the company’s cashflows this year, exacerbated by a continuing fall in EBITDA.

The loan itself, issued to and secured against URSA (responsible for 72 percent of Uralita’s sales in the first quarter of last year), will accrue PIK interest until maturity in 2021 as well as paying cash interest. Details of the covenant package were not disclosed.

In refinancing all the existing debt, KKR has helped to rationalise the company’s debt, and remove the need for additional financing until 2021. Mukadam says: “A lot of funds are short term in nature but we have 10 year money and can take a longer term view.”

An upturn in fortunes?

The most recent performance figures for the company, a 2013 third quarter business performance update, suggest the company still has much to do. Sales, EBITDA and net profit all contracted compared to the same period in 2012, by almost a quarter in the case of EBITDA.

It is certainly a challenging market, and there’s a question mark hanging over how much more the company can do to rationalise its cost base and slim down. Since 2009, it has sought to adapt to falling activity levels, closing down non-strategic plants and assets, implementing temporary stoppages and shift reductions, and reducing the number of support staff.

The economic recovery in Europe, and particularly in Uralita’s home market of Spain, is at best fragile. For Uralita, KKR’s intervention has given it a much-needed lifeline, and the time to see if an economic recovery will flow through to its own balance sheet growth. KKR, as its head of European corporate affairs Ludo Bammens points out, is in it for the long haul. “The deal was a win-win situation for everyone. The company is now in much better shape. There’s no short-term trading of its debt, and the company now has a long-term partner in KKR. There’s a true alignment of interests.”