Sanitec makes history as first LCDS default

Sponsor-backed Swedish bathroom fittings maker Sanitec made history, albeit unwillingly, last week, when it became the first reference credit to have a default declared against it by loan credit default swaps (LCDS) traders.

Sanitec breached its banking covenants at the end of the year and restructuring discussions are ongoing. Sponsor EQT and lead bank RBS have gone to lenders with a proposal that would see the private equity firm invest €100m in new equity into the business, in exchange for a reduction in debt from €850m to €350m.

A source away from the deal said creditors were underwhelmed by the proposal, but have allowed time for further discussions.

The outcome of the restructuring talks will be keenly watched across the Nordic region in particular, where regional sponsors have to date benefited from supportive banks thanks to a reputation for maintaining value in their deals.

On January 8 LevX credit derivatives index dealers accepted that the Sanitec default constituted a relevant credit event under LCDS rules and voted to hold an auction to facilitate settlement of LCDS trades referencing the credit.

The auction process will now determine the value of LCDS contracts, which will then be settled with counterparties. Under CDS terms a payment default, insolvency or restructuring are regarded as relevant credit events.

Dealers will now have to agree terms and a date for the auction, the first of its kind in Europe. As a result of the default Sanitec will be removed from the LevX Snr LCDS index at the next index roll on January 19, and will be replaced by Ista.

EQT acquired Sanitec in a 2005 secondary buyout from BC Partners. The deal was backed by €1.015bn of debt arranged through bookrunner RBS, MLAs Mizuho Corporate Bank and HVB and JLA Nordea.

The deal was backed by €880m of senior debt and €135m of second lien.

Senior debt was split into a €340 seven-year term loan A at 225bp over Euribor, a €225m eight-year term loan B at 275bp, a €225m nine-year term loan C at 325bp, a €40m seven-year revolver at 225bp and a €50m seven-year restructuring line at 225bp.

The debt syndication struggled initially, finally finished after a decision to flex margin on a €135m 9-1/2-year second-lien tranche up half a point to 600bp. Leverage was 5.75% total, 4.9x senior.

New index name Ista is a German metering and utility billing group that was bought out in 2007 in a €2bn Charterhouse Capital Partners‘ backed deal from CVC.

When the deal was put in place senior debt was split between a €1.55bn eight-year B loan, a €60m seven-year revolver and an €80m capex facility. In addition there is a €450m second-lien piece.