Sponsors Face Setbacks As Holdings Struggle

Sponsor firms are putting goose eggs on the scoreboard as struggling portfolio companies, beset by a long recession and structural changes in the economy, slump into insolvency, according to Reuters, a sister news service of Buyouts.

In recent weeks, at least three portfolio companies—Summit Business Media Holding Co., backed by Wind Point Partners; pizza chain Sbarro Inc., a holding of MidOcean Partners; and music publisher EMI, owned by the British shop Terra Firma—have filed for bankruptcy, defaulted on debt, or simply ran out of time with creditors, wiping out their backers’ equity investments.

Summit Business Media filed a prepackaged Chapter 11 plan for bankruptcy protection after agreeing with most creditors on a plan to eliminate $140 million of debt from its balance sheet.

The New York-based publisher of 16 magazines, 20 Web sites and 150 reference titles filed with the U.S. bankruptcy court in Wilmington, Delaware. Several affiliates of the business-to-business media company also filed.

Wind Point Partners, a Chicago-based private equity firm, controls 85 percent of Summit’s equity, while management owns the remainder, the company said. Debt and general unsecured claims totaled about $252 million, the company said.

Thomas Flynn, Summit’s chief operating officer and chief financial officer, said in a court filing the company plans to convert $188.6 million of senior secured first-lien debt into $116 million of new loans, giving the creditors an 89.4 percent equity stake in a reorganized company. Holders of second-lien debt would get most of the remaining equity, he said, and existing equity would be wiped out.

Sbarro Inc., a pizza chain with nearly 1,000 restaurants in 30 countries, said it notified lenders of a default under a credit agreement and hired Rothschild Inc. to help it explore strategic options. The chain later hired bankruptcy and restructuring lawyers, The Wall Street Journal reported

The restaurant industry was hurt in the U.S. economic downturn as many customers cut costs by dining more often at home. Customer traffic also suffered in malls, where many of Sbarro’s restaurants are located.

MidOcean Partners, a private equity firm with offices in New York and London, bought Sbarro in 2007 and according to a filing holds 95 percent of its second lien debt.

Sbarro and MidOcean did not immediately return calls seeking comment.

Citigroup swooped in to take control of EMI, a blow to the music company’s private equity owner which had fought a long battle to keep hold of the debt-ridden label.

Home to artists such as Katy Perry and Iron Maiden, EMI has been the center of a power struggle for months. The label had been suffocating under a burden of debt borrowed from the U.S. bank in a 2007 leveraged buyout by Guy Hands‘ Terra Firma.

To facilitate the handover to Citi, accounting firm PwC was appointed as administrator. PwC said that appointment occurred after the Terra Firma investment vehicle defaulted under its loan facilities.

Under the deal, Citi bought 100 percent of EMI’s share capital. The bank cut EMI’s debt by 65 percent to £1.2 billion ($1.9 billion) from £3.4 billion through a debt-for-equity swap, EMI said in a press release. EMI has in excess of £300 million of cash available, it said.

Citigroup, which provided £2.6 billion of debt for the 2007 buyout, wrote off most of EMI’s loans after the investment vehicle set up by Hands’ Terra Firma defaulted.

The move tees EMI up to be sold again as the U.S. bank will likely not want to hold the music company for the long term. A source familiar with the situation told Reuters Citi did not see itself as a long term owner but said it was in no rush to sell the business.

Jonathan Stempel is a Reuters correspondent in New York. Lisa Baertlein, Megan Davies, Kate Holton, Liana B. Baker and Andre Grenon also contributed to this report.