Bankruptcies No Longer Mean End Of Road

Cut bait and walk away—that’s the traditional course of action when a portfolio company files for bankruptcy. But now several buyout shops, including Sun Capital Partners, JLL Partners and Catterton Partners, and have been reacquiring stakes in businesses that sunk into insolvency under their watch.

“The mantra in this market is ‘invest in what you know, and don’t stray from strategy,’” one investment banker told Buyouts. “For some that may mean going to the extreme and reacquiring a company even though they already lost money in it once.” Another big motivation for buyout shops is to stay on good terms with lenders during a time when it’s grown increasingly difficult to finance new deals, and refinance ones that have run into trouble.

Boca Raton, Fla.-based turnaround shop Sun Capital is leading the trend. The firm has already reinvested at least three portfolio companies that filed for bankruptcy earlier this year. The first of these deals came in March, when Sun Capital required Fluid Routing Solutions Inc. (originally acquired in May 2007) after the automotive component supplier filed for Chapter 11 bankruptcy in February. In July, the firm announced that it reacquired Big 10 Tire Stores Inc. (originally acquired in November 2006) after the tire dealer voluntary filed for Chapter 11 protection in April. And in late August, the firm reinvested in teen apparel retailer Anchor Blue Retail Group Inc. (originally acquired in November 2003) after the company filed for bankruptcy in May. Sun Capital reportedly has already turned a profit on its investment in Anchor Blue through a minority-stake sale of the company to Ares Management.

Meantime, this May mid-market manufacturing and service industry specialist JLL Partners reacquired a portfolio company when it invested about $100 million of equity into J.G. Wentworth, a buyer of structured settlements and annuities, as a part of the company’s prepackaged bankruptcy. JLL Partners originally acquired the Bryn Mawr, Pa.-based company in the summer of 2005 for an undisclosed amount, and has since recapitalized the company twice—the second time in April 2007—allowing the firm to return 2.33x its $125 million investment in the company, according to Buyouts.

Calls to Sun Capital and JLL Partners were not returned by press time.

Catterton Partners decided to retain a stake in Lang Holdings, the second largest U.S. publisher of calendars, after the company filed for Chapter 11 bankruptcy in July. Last month, the Greenwich, Conn.-based firm teamed up with Sun Capital to purchase Lang Holdings out of bankruptcy for $25 million. The supplier of art, design and sports driven calendars has been a portfolio company of Catterton Partners since 2003.

In an emailed statement, a Catterton Partners spokesperson told Buyouts that Lang Holdings is a “solid company with substantial upside,” adding: “The restructuring was necessary, not because of business performance, but rather because of lack of working capital availability due to the challenging credit markets at that time.”

Regardless of the circumstances leading up to the bankruptcy, the decision to repurchase a portfolio company after it falls into insolvency carries a substantial risk to reputation, should the deal take yet another dive, one deal pro said. “LPs don’t expect you to be perfect—they know some deals are likely to go bad,” said a managing director of one Boston-based buyout firm. “But if you do the same bad deal twice, you look pretty stupid.”

Meanwhile, the list of LBO-backed bankruptcies continues to grow—or, viewed optimistically, deal flow continues to grow for some buyout shops. As of Nov. 5, no less than 74 companies backed by U.S. sponsors have filed for bankruptcy so far in 2009, according to information compiled by Buyouts. Full-year 2008 saw a total of only 49 U.S. sponsor-backed bankruptcies.