Private equity haunted by pre-crisis deals

John Bakie
16 August 2010

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As AA and Saga are hitting the headlines once again, private equity it seems is being haunted by the ghosts of 2007тs exuberance. While the years preceding the financial crisis saw some of the largest private equity-backed deals of all time, many of these are weighing on the minds of the industry's biggest players. John Bakie gives an overview.

In the years before the credit crisis, private equity was characterised by ever larger deals, requiring ever larger quantities of leverage. While this was much celebrated at the time, the dangers of overleverage became all too clear as financial markets crumbled, and the global economy quickly followed.

The latest annual figures for Acromas Holdings, the parent company of both the AA and Saga, show a combined loss of £529m, largely due to crippling debt repayments. The firm made an operating profit of £578m, but interest payments from debts piled on by Charterhouse, CVC Capital Partners and Permira added up to a whopping £705m. The combined business's net debt increased by 3% to £6.4bn, and the group's pension fund liabilities have ballooned over the past 12 months, from £49.6m to £194m at the end of January 2010.

The company is one of several major buyouts completed between 2005 and 2007 when the economy was booming, which have recently run into trouble. In July, Gala Coral completed a restructuring deal, which saw private equity investors Candover, Cinven and Permira exit the firm with writedowns amounting to over £600m. The company was forced to seek a mezzanine investment in January this year, after struggling to refinance £2.5bn of debt. This summer, those same mezzanine investors - Apollo Management, Cerberus, Park Square and York Capital - took control of the company with a £200m equity investment.

NXP Semiconductors, which recently listed on the Nasdaq, is another firm that has struggled with its debts. Its investors, which include KKR and Apax, have attempted to reduce the firm's debt pile by buying back $350m worth of senior secured notes. However, despite these attempts, the company has floated with a market cap of just €3.5bn, less than half the €8.3bn it was valued at in 2006.

The difficulties experienced by these and other buyout targets demonstrate the problems associated with highly leveraged transactions, particularly at the top of the economic cycle. With more loans due to be refinanced in the coming year, the problems outlined above could be just the tip of the iceberg.