Fat Face owner Bridgepoint is the latest financial sponsor to buy debt associated with a portfolio company, in a trend that is unsettling other debt investors. The sponsor has purchased £10m of the total £210m debt package that backed a £360m secondary buyout of clothing retailer Fat Face from Advent International last year.
A person familiar with the matter described the purchase as a “one-off speculative opportunity due to debt price irrationality”, rather than a concerted move into the debt market. Debt was trading in the late 50s and early 60s when the purchase was made.
The debt was bought by the same Bridgestone buyout fund that owns Fat Face equity, rather than by the borrower Fat Face. It is unclear whether it will be cancelled – in effect deleveraging the business – left to run its course by the sponsor, or potentially traded out of on a market rise.
The incentive for a sponsor to buy debt cheaply in a portfolio company when it is confident of the outlook is obvious. Lenders have mixed views. Some lenders oppose the practice on principle, saying it necessarily creates a conflict of interest. Others are more pragmatic but are wary of seeing large debt stakes being built, potentially creating situations in which an equity holder could form a blocking minority within a lender group and in effect protect the equity from unified lender action.
The trend may also complicate the relationship between sponsor and borrower where treasurers have two ostensibly contradictory criteria to meet for the same investment manager.
Lenders would rather see a formal process, with the borrower launching a tender process to buy back and cancel debt. However, deals such as the Fat Face purchase are legally uncontroversial and are certainly being done. French sponsor PAI bought part of the second-lien tranche of Lafarge Roofing at a price of 65 and Danish telecoms company TDC has bought back hundreds of millions of euros of debt in the secondary market.
The Fat Face debt was structured and syndicated by BNP Paribas a year ago, at the top of the credit market. It features £210m in debt facilities backing the £360m buyout. The facility is made up of a £40m term loan A and a £20 revolver both of seven years and each paying 200bp, a £110m eight-year term loan B with a 262.5bp margin and £40m in second-lien paying 500bp.
Banks were invited to join on a single £15m ticket paying 75bp. Leverage is 4.7 through senior and 5.9 in total.