MGPE loses out on Vantico

Morgan Grenfell Private Equity looks set to lose out on its investment in Luxembourg-based epoxy resin manufacturer, Vantico. The company, which is in restructuring talks with its lenders, has agreed a debt-for-equity swap with its bondholders. The proposed debt-for-equity swap will involve the holders of Vantico’s senior notes and MGPE exchanging their existing debt for 95 per cent of the ordinary equity of the company.

In the past few months Vantico’s performance has continued to deteriorate, culminating in the deferral of a loan payment due on December 31. The company subsequently paid an amortisation payment of CHF22.4 million on January 28. Vantico is continuing discussions with its bank group regarding amendments to its senior credit facility and expects to finalise these decisions in the near future. MGPE declined to comment on the transaction.

Vantico was created in June 2000 through a management buyout of the performance polymers division of Ciba Specialty Chemicals, backed by Morgan Grenfell Private Equity, which has since been subsumed into DB Capital Partners’ operations. Deutsche Bank is currently in negotiations with the management team of DB Capital Partners (DBCP) to carry out an MBO of its private equity portfolio – see evcj December/January 2003, page 2.

Following a difficult fourth quarter, last March MGPE agreed to underwrite a CHF50 million equity injection in the company and in December the group reviewed the strategic options in relation to its capital structure and concluded that a restructuring of its balance sheet was required.

Upon completion of the proposed restructuring, MatlinPatterson Global Opportunities Partners, a member of the committee of Vantico’s senior note holders, is expected to become the majority shareholder in Vantico. MatlinPatterson expects to transfer this equity interest to the Huntsman group of companies, which is jointly owned by the Huntsman family and MatlinPaterson.

According to ratings agency Fitch, the default by Vantico warns investors that European chemicals leveraged buyouts continue to be highly volatile. “The current operating environment for chemicals companies is challenging. Fitch does not believe that 2003 will show any significant improvement on 2002,” says Rachel Hardee, director in Fitch’s leveraged finance group. This is of particular significance to European leveraged chemicals transactions since the obligations and restrictions of operating with excessive financial leverage serve only to exacerbate operational difficulties in this cyclical sector, she says.

Vantico’s performance has witnessed a steady deterioration and Fitch notes other pre-2001 transactions in this sector remain under considerable pressure to generate sufficient net-free cash flow to pay down senior debt. In such highly leveraged chemical transactions, this pressure is exacerbated by the demands of capital expenditure and substantial cash interest payments.