Beneath the surface

The effects of the inflated buyout market running up to the credit crunch and the distorted amounts of leverage are slowly taking their toll in France. PAI partners has been fighting an unsuccessful tug of war with the creditors of its roofing portfolio company Monier (formerly Lafarge Roofing), and has resigned itself to writing off its investment. Meanwhile Wendel, after its reshuffle at the top, is in ongoing negotiations with the creditors of Materis, its building materials company, and LBO France is attempting to iron out debt renegotiation for Terreal, a company which makes terracotta products used for roofs, structural work and wall claddings. With the emergence of opportunistic debt investors and the possibility of an increased number of highly indebted companies entering restructuring, certain buyout houses might just be seeing the tip of an iceberg.

PAI partners

PAI partners' case seems close to conclusion after it told its investors that it would not improve the restructuring proposals it had submitted to Monier's debt lenders. The counter-offer, orchestrated by distressed investors Apollo, TowerBrook Captial and York Capital and accepted by the management, would effectively wipe out PAI's entire investment in the company.

In previous proposals, PAI had initially sought to keep a majority of the equity and offered to inject fresh capital in the company, followed by an improved offer handing the majority stake to debt holders. In return, PAI was seeking a reduction in the company's EUR1.8bn debt to around EUR500m. Although PAI's proposal actually reduces the debt by more than the creditor's proposal (EUR700m and EUR300m PIK), the latter have offered to lower interest rates. Additionally, the lenders propose a cash injection of EUR150m through an underwritten senior secured credit facility, EUR50m provided on an uncommitted basis and further EUR50m to finance asset sale and lease back operations. Concerns have however also been raised over the creditors proposal. The negative coverage has further dented the company's income with predictions of only EUR110m EBITDA for 2009 which would barely cover interest payments.

Adding to its woes, PAI also recently lost control of another of its investments, when it reached agreement with Philips to sell Italian coffee machine manufacturer Saeco for a reported EUR200m - less than the companies EUR500m debt. Despite this, PAI's president Dominic Megret maintains that the private equity house's fourth fund is still in profit and has plenty of capital left for new deals.

Wendel

Wendel purchased Materis in a tertiary buyout in January 2006 for EUR2.1bn, 8.5x its EBITDA, and financed the acquisition with EUR1.7bn of debt. With profits dropping to EUR33m last year (from EUR46m in 2007), the debt repayments had become an issue for the company. Negotiations have been ongoing since the start of the year, with an agreement on the horizon said to involve Wendel injecting around EUR40m of equity into the firm. BNP Paribas, the principal creditor alongside a number of French banks, would subsequently alleviate the firm's debt. Wendel is also in debt renegotiations with Stahl, the Dutch leather company it purchased form Carlyle in 2006 for EUR520m.

LBO France

LBO France-backed Terreal was purchased by the investor in 2005 for EUR860m. Discussions between investor and creditors commenced back in September 2008 with the firm's principal debt holders, SocGen, ING and RBS. LBO France had initially proposed to inject EUR70m in the firm; however, in April a counter-offer was made by the creditors to swap a chunk of Terreal's debt for equity as well including a capital injection from LBO France.

Negotiations regarding Monier, Terreal and Materis are likely to have a formal outcome before the summer sets in, for better or for worse. It is possible that a number of companies carrying a lot of leverage could soon face similar issues. While a reassuring AFIC-backed report suggests that 80% of current portfolio companies in France are still meeting their debt commitments and that only 4% are actively struggling in their debt renegotiations, we have not yet seen the bottom of the current trough. This could well be the middle of a w-curve with regards to covenant breaches. Come the end of Q2, It wouldn't be a surprise if we saw a few more investors go to the negotiating table over some of their portfolio companies' debts. Incidentally, a number of eyebrows have recently been raised over the financial health of cable operator Numericable, purchased in early 2008 by Cinven, Altice and Carlyle, which is carrying a debt of EUR2.9bn.

Additionally, while other private equity houses have previously been forced out by the lenders, (for instance, Candover and Premira earlier this year), Monier is the first case where debt holders are keen to take control themselves. Banks, particularly in France, have traditionally not been interested in taking control of companies since they lacked the expertise. However, with increasingly interested and monetised distressed investors, Monier might be an example of restructuring battles to come.

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