First Reserve Buying Spree Paces Industry

What credit crunch? Since the market began slowing in August 2007, energy-focused shop First Reserve Corp. has accounted for more than 25 percent of the disclosed deal volume announced in North America and Europe, according to an analysis by Morgan Stanley.

Recent transactions include the pending $3.7 billion take-private of CHC Helicopter Corp., an oil-field services business, and the recently closed $3.2 billion LBO of Abbot Group plc, a Scottish off-shore drilling business. Those two are among the biggest deals announced by anybody in the last eight months. CHC Helicopter is the largest in the firm’s history, both in terms of overall enterprise value and the size of the firm’s equity check (more than $1 billion).

In the first quarter of 2008, First Reserve, based in Greenwich, Conn., led all financial sponsors in fees paid to investment banks, an indicator of the firm’s robust deal pace, according to Dealogic.

Because of this torrid deal pace, the firm is in the market to raise a successor fund to its eleventh vehicle, a $7.8 billion pool closed in 2006. First Reserve is reportedly looking to raise $12 billion for its newest effort, according to published reports. The firm declined to comment on its fundraising activity.

A variety of factors has come together in the last six months to explain First Reserve’s ability to do deals while many of its peers are sitting out. For one, the energy industry hasn’t experienced any kind of slowdown; since September 2007, the price of a barrel of oil, an important gauge for the sector, has leapt by 30 percent. That has prompted capital-constrained banks to find room to make loans to back First Reserve companies.

“If we were in the auto-parts space or building-products industry, we wouldn’t be able to get any financing,” said Kenneth Moore, a managing director who oversees First Reserve’s capital markets efforts. “There’s no question the health of our sector has helped us secure debt.”

The firm has also benefited from unusual characteristics of the companies it’s bought. A large piece of the credit package backing the CHC Helicopter deal came in the form of existing operating leases that carry an interest rate of LIBOR plus 200 basis points, far cheaper than a L+500 cash-flow senior loan that’s standard for the market right now.

First Reserve has also looked abroad for deals. Abbot Group is based in the United Kingdom, where leveraged lenders remain somewhat active, at least compared to the moribund United States market, Moore said. In the same vein, First Reserve was able to emphasize the revenue generated in Europe by Canada-based CHC Helicopter; a large chunk of the company’s operations are devoted to serving exploration activities in the North Sea.

To be sure, First Reserve has helped its cause by writing bigger equity checks, as much as 40 percent for control-stake deals. It’s also shown a willingness to do all-equity deals for start-ups and growth plays, as evidenced by back-to-back investments in late November and early December for a green-energy business and a deep-sea drilling venture.

Finally, when the credit market melted down last summer, First Reserve, unlike many other large-market buyout firms, didn’t find itself having to negotiate hung deals, Moore said. While other shops have spent the last months of 2007—and, for some, the early months of 2008—haggling over credit terms and covenants with banks, First Reserve has been able to focus on doing new deals.

First Reserve has also been active on the exit front—even in a sputtering IPO market. One of its portfolio companies, New World Resources B.V., filed to go public earlier this month. The Dutch-based owner of the largest coal-mining company in the Czech Republic is seeking to float about a third of its estimated $3.8 billion enterprise value on stock exchanges in London, Warsaw and Prague.