Domino effect

01 July 2009

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It was two years ago this summer that the repercussions of financial engineering first started reverberating through the system. It has been a protracted process. The long-awaited wave of defaults is starting to take shape, with levels doubling in Q1 to 3.8% for European leveraged loans by number of borrowers. The figure stood at 1.8% for Q4, according to Fitch Ratings.

In Benelux, Rabo Private Equity-backed Econcern filed for voluntary receivership (see page 29), with current market illiquidity plus lower price for carbon fuels negatively affecting the company's trading. Other companies in the region are also experiencing financial difficulties (see cover).

In Italy, Candover and Permira were carved out of Italian yacht maker Ferretti recently in a EUR1.7bn deal. This, despite the fact that in May 2008 there were rumours indicating Candover was eyeing up a second IPO for the business. This was before the full extent of the economic downturn was apparent, and Ferretti was posting profits of EUR158m on a EUR933m turnover (2007).

Of the private equity companies defaulting on debt or going bust over the last 12 months, the vast majority were deals completed during the 2006-07 boom period and over-leveraged, with an overly optimistic outlook. Much of the trouble is likely to come from "recycled deals" - those passed between sponsors (secondary, tertiary buyouts) - and recapitalisations. Both types of deal were rampant during the boom years of 2005 - H1 2008 and involved aggressive growth forecasts, which are increasingly difficult to attain.

Industry experts expect this second wave to start in H2 2009, once companies' yearly results start rolling in. Distressed companies may see many industrial buyers take up the opportunity to acquire good assets at a discounted rate, perhaps offering to take them off creditors' hands in exchange for a write-off. In the case of PAI-backed Monier, distressed specialists funds Apollo Management, TowerBrook Capital and York Capital are working with senior lenders. The deal would see them provide a EUR150m equity boost structured via a senior secured credit facility and an extra EUR50m available on an uncommitted basis. The move could halve the company's debt to about EUR1bn.

What is true is that the recession is a deep one and there is no such thing as a safe-haven, not even for counter-cyclical sectors. One can only hope that one man's loss is another's gain.

Yours sincerely, Francinia Protti-Alvarez

Editor, Benelux unquote"

Tel: +44 20 7004 7475

Francinia.protti-alvarez@incisivemedia.com.