A group of senior lenders won court approval to take control of British car cleaning company IMO Car Wash on Tuesday in a landmark ruling that junior lenders fear will weaken their hand in future restructuring cases.
Distressed debt and mezzanine investors packed into a cramped London courtroom to be told that IMO’s senior lenders could take ownership of the company, despite objections of lower-ranked mezzanine lenders owed about £90m.
“This is an example of where a steep fall in the value of a business leaves junior creditors under a rising tide,” said Karl Clowry, a restructuring partner at Paul Hastings.
Mezzanine lenders objected to the scheme partly because of the low valuation of the company used by the senior lenders, including Lloyds Banking Group, who are owed just over £300m.
The judgment, after three days of hearings, gives a “clear indication” of the view of the courts when valuing distressed assets in restructurings, said Paul McLoughlin, a restructuring partner at law firm Lovells, adviser to the senior lenders.
Dusting off plans
Senior lenders will now dust off plans to take control of other firms through similar schemes of arrangement, a distressed-debt investor source said.
Many companies, particularly those owned by private-equity companies bought through leveraged buyouts, have large amounts of senior debt, meaning those lower down the capital structure may be squeezed out through restructurings, the investor said.
“This may end up being disastrous for junior lenders, as their leverage in restructurings has gone. It’s back to the old days of senior lenders calling the shots,” he said.
Mezzanine lenders to IMO Car Wash, which include Partners Group, failed to persuade the judge that senior creditors’ valuation of IMO was too low and the company would be better served without the proposed debt restructuring.
In a restructuring from earlier this year, junior lenders to Four Seasons Healthcare blocked a debt for equity proposal from the company, delaying a deal for months.
Private equity firm Carlyle loaded IMO Car Wash with debt in a leveraged buyout in 2006. Restructuring talks began earlier this year when IMO failed to meet terms on its debts as it struggled with volatile sales and its debt burden.
“Refusing to sanction the scheme in order to throw the parties into a further negotiation is not a legitimate or sensible use of the court’s power,” Justice Mann said after the three day case.
“I do not consider they (the mezzanine lenders) have a relevant economic interest in the scheme companies,” Mann said.
By Tom Freke. Editing by Jon Loades-Carter