You don’t know about me without you have read a newsletter by the name of The Private Equity Analyst; but that ain’t no matter.
Don’t ask why the opening of a Mark Twain novel came to mind in sitting down to write my first “From The Editor” column for Buyouts. But this past year, which I spent reporting on the restructuring market for Dow Jones & Co., certainly ranked as an adventure. At every turn I ran into bankruptcy attorneys and crisis consultants who delighted in guiding a green columnist to interesting story ideas—many of them with a buyout angle.
Second-lien loans, for example, are as hot a topic in the restructuring world as they are in our industry. It’s for a different reason, though.
Whereas deal sponsors are still frosting their deals with cheap second-lien loans, bankruptcy professionals are peering ahead, trying to figure out just how lenders will behave when companies go into default. Will they quietly defer to first-lien lenders, as their inter-creditor agreements often call for them to do? Or will they fight to assert the rights that they ostensibly gave up in order to take control of the restructuring process? Early Chapter 11 cases involving second-lien loans portend epic battles ahead.
Bain Capital starred in another of my columns. The buyout firm had been the subject a complaint filed in Delaware Chancery Court by Big Lots Stores Inc. The company had sold its KB Toys business to Bain Capital in December 2000, providing $45 million in seller financing. Through a 2002 recapitalization, Bain Capital more than quadrupled its equity investment, according to the complaint. Not so Big Lots Stores, still owed money after KB Toys filed for bankruptcy protection less than two years later in January 2004. Big Lots Stores accused Bain Capital of depleting the company of so much cash that bankruptcy was inevitable; the suit has since been dismissed.
In my second-to-last column on the bankruptcy market I again returned to my roots. I felt it my duty, in the midst of the buyout boom, to remind folks of this forgotten fact: Not all deals generate stunning rates of return. Of 19 companies highlighted as “weakest links” in a recent report by ratings agency Standard & Poor’s, at least four are owned by buyout sponsors. They include Amtrol Inc., a water equipment company owned by Cypress Group LLC, New York, and Ziff Davis Media Inc., a technology publisher owned by Willis Stein & Partners LLC, Chicago. Both companies have been put up for sale.
I enjoyed my year writing about the restructuring market. But predictions of a coming avalanche of defaults never did materialize, and it didn’t take long for me to miss talking to all my old sources and friends in private equity. I’ll probably be a lot more thoughtful the next time I have an opportunity to cast off for a new market.
I been there before.