Sponsors get tough

Sponsor TPG has tabled a restructuring proposal that would see it retain 65% of chemicals business Vita (formerly British Vita) in exchange for a €60m equity injection. The offer is aggressive compared with traditional restructuring terms, but is in line with recent examples that have seen sponsors demand huge concessions in exchange for supporting corporates.

Sponsor aggression is taking place against a background of general illiquidity and dire corporate performance, which means lenders are being forced to contemplate looming insolvency as the alternative to agreeing deals. Sponsors are also reacting to tough talking from their own LPs, who have been dismayed by the performance of private equity portfolios.

In exchange for the new liquidity, Vita’s senior lenders are being asked to write down €533m of a €633m debt pile and instead take a 32.5% equity stake. They have also been asked to provide a €35m revolving credit facility. Mezzanine creditors would receive 2.5% of equity in the business in exchange for their support and for providing part of the equity injection.

The deal fits into a pattern of aggressive restructuring proposals that have seen sponsors only provide new liquidity to portfolio companies in situations where lenders are prepared to “share the pain” by dramatically deleveraging the business and agreeing to accept that new liquidity comes into deals either as fairly senior debt or well-valued equity.

The rise of the trend reflects the shifting power balance between banks and cash-rich private equity houses. Last October sponsor Carlyle injected £25m into IMO Car Wash in the form of a PIK loan in exchange for covenant headroom. It is now asking lenders to write down debt in exchange for injecting the same amount of cash into the same company.

Candover has proposed a deal that would allow it to keep a majority stake in yacht maker Ferretti in exchange for injecting €100m in new money into the deal. Senior lenders would take a 33.33% write-down on their loans and take a 30% equity stake. Junior lenders would write off their debt but take a 15% equity stake. The company last week asked lenders for a €65m revolver.

Also in Italy, PAI Partners has proposed a deal that would see senior lenders to coffee-machine maker Saeco take a 60% write-down on their debt, in exchange for equity and a cash injection from the sponsor. Junior lenders would see their entire investment converted into a 3% equity stake.

In Sweden sponsor EQT has proposed a restructuring deal for Sanitec, that would similarly see the sponsor retain control of the business in exchange for injecting new capital into the business. The deal would probably see second-lien lenders wiped out and senior debt reduced.

Last December Nordic Capital agreed a deal to retain majority ownership of sports equipment maker Thule in exchange for a €46m capital injection. Senior lenders converted part of their debt into preference shares while mezzanine lenders were effectively wiped out.