There may be trouble ahead ..

01 July 2009

Tweet
Facebook
LinkedIn
Google plus
Send to

Following Permira and Candover's equity wipe-out with Italian yacht maker Ferretti, it is PAI's turn to get a haircut with the lenders taking over at Monier, its roofing portfolio company. All of these are a direct result of the combination of the leverage frenzy and the subsequent economic slow down. Now investors are addressing the leveraged issues of troubled portfolio companies such as LBO France's Terreal and Wendel's Materis. It should be noted that these companies have been in negotiations with creditors for the best part of the year and are likely to find a sensible conclusion

The case of PAI can be seen as an unfortunate exception. However, if we compared the number of companies in negotiations to the large number of highly leveraged companies there is room for concern. Indeed, given the amount of debt to be paid back in the next 8-10 years and that the economy is still maimed, we are likely to see a growing number of highly leveraged companies going into restructuring. This itself could bring a couple of additional concerns to a private equity owner.

At first, concerns rise in client confidence. A restructuring process will undeniably affect client perception of the company which could further weaken its business at a crucial time in the negotiations. The second concern is illustrated by what has just happened with Monier. There are a growing number of opportunistic inventors with important amounts of dry powder seeking to snap discounted debt that banks are keen to wipe off the balance sheet. Provided that they are able to restructure and turn the company around, it could prove an attractive way to gain control, or at least a significant position, in a firm's capital.

But this is not the only trend we are seeing. Coller's most recent private equity barometer has shown a dip in LPs confidence in the asset class. One fifth of LPs said they would reduce their allocations as they expect close to a quarter of buyout houses to go out of business.

But not all is doom and gloom. France has weathered the downturn better and appears to find itself in a healthier position than its neighbours. It is likely that the proportion of GPs that will go bust will be far smaller than abroad, affecting mostly underperforming teams. The government may be trying to impose restrictive legislation on one hand, but it is also providing companies with beneficial changes in the tax law. The changes would allow companies to purchase their own discounted debt from banks with more favourable taxation terms, possibly averting covenant breaches or unwarranted creditor takeovers.

Yours sincerely,

Francois Rowell

Editor, France unquote"

Tel: +44 20 7004 7524

francois.rowell@incisivemedia.com.