The UK’s high court approved a scheme of arrangement Tuesday that will give senior lenders control of The Carlyle Group’s struggling portfolio company IMO Car Wash, in a decision that highlights the importance of valuation techniques in deciding the fate of companies undergoing restructuring.
Carlyle’s initial equity investment of £145 million ($240 million; €169 million), as well as a £25 million loan Carlyle extended to the company in 2008, will be wiped out. The company’s junior lenders, a consortium of unnamed hedge funds, will also lose their £90 million investment. IMO breached its banking covenants on a £355 million debt this February, at which point its equity and debt holders because restructuring talks. Yesterday’s decision will pave the way for the company to enter a formal insolvency with a “pre-pack” deal in place.
I think a number of the junior investors were hoping that they might be able to persuade the court to start looking at these things in a slightly different way than the way they have historically, arguably in a more US style
The junior lenders and the senior lenders both presented the court with valuations for the company, which was bought for £450 million in 2006. The senior lenders, who were advised by PricewaterhouseCoopers, claimed that the company is now worth around £250 million – not enough to pay back the senior lenders. Their valuation was based on one actual offer for the company, as well as comparable transactions in the market.
The junior lenders used a Monte Carlo analysis, a probabilistic model based on expected future cash flows. That model predicted that the company is worth around £320 million, which would leave some cash for the junior lenders and give them a say in the restructuring process.
The court sided with the one-bid senior lenders, approving a plan that will allow them to exchange their debt for 100 percent of the equity in IMO after it emerges from insolvency proceedings.
“What the English judges have said is if you’re in a situation where the debt can be accelerated and security enforced, the business is going to be sold, so actually the value is what the business would be sold for,” says Bruce Bell, a partner at law firm Linklaters. “And if unfortunately the economy’s in dire straits and that means the recovery is going to be low, that’s tough, basically.”
UK courts have a long history of valuing bankrupt and nearly bankrupt businesses at the price they could be sold for immediately, whereas US courts tend to value these business based on what they could be sold for after a restructuring, said Bell.
“This is the first time anybody’s had a proper argument about it in court for a long time, and I think a number of the junior investors were hoping that they might be able to persuade the court to start looking at these things in a slightly different way than the way they have historically, arguably in a more US style,” Bell said. “And they’ve failed to do that.”
Carlyle declined to comment.