Sun Capital doubles down with DIP moves

The turnaround specialist, which has seen about 10 of its portfolio companies tumble into bankruptcy since last year, has extended debtor-in-possession loans to two of its bankrupt companies and plans to control them after they emerge from Chapter 11.

Sun Capital Partners is pursuing a unique bankruptcy strategy intended to salvage some of its struggling portfolio companies that could otherwise disappear into liquidation.

The firm, which manages more than $9 billion, has provided debtor-in-possession financing to two of its portfolio companies that filed Chapter 11 to keep control of them through the bankruptcy process. The firm’s strategy is to buy the companies out of bankruptcy through debt and operate them in their reorganised form.

“We have some companies where it’s a good business, we like the business and it’s been impacted by the downturn in the economy but we see upside for it in the future,” David Blechman, a principal with Sun Capital, said in an interview with PEO. “Where we see that, we’re willing to put additional capital in and support the business any way we can.”

Sun Capital-backed Fluid Routing Solutions, an auto-parts maker, sought bankruptcy protection on 6 February as liquidity constrains caused by the downturn in the auto-parts industry hampered its ability to operate. Sun Capital provided a $12 million DIP loan to the company the day the company filed and put in a purchase contract to buy three out of four of the company’s plants. Sun Capital also purchased some of its debt in Fluid Routing Solutions before the bankruptcy filing to further solidify its controlling position.

The firm shed one unprofitable business line – the one plant it didn’t buy – and saved 900 jobs through the restructuring, Blechman said, adding the business is now debt free.

Sun is using the same strategy with its portfolio company, Big 10 Tires, which filed for bankruptcy last week. The firm bought back debt in the company, and will propose to buy the company in exchange for its debt claim, Blechman said. Sun also is giving Big 10 between $1 million and $3 million in DIP financing to operate through bankruptcy. 

“We’re trying to support companies we think have a good reason to live,” Blechman said. “We see upside for them on the other side of the economy coming out of the recession.”

Sun Capital has had about 10 companies go bankrupt since last year. One of its biggest investments, Mervyn’s, slid into bankruptcy last spring and then into liquidation in the fall after it failed to attract any buyers.

Another private equity firm, TPG, has expressed interest in joining the DIP lending group that is providing about $1 billion bankruptcy financing to its portfolio company Aleris International. The firm declined to comment on whether is has decided to join the lending group.

Aleris received a $500 million term loan from Oaktree Capital Management and Apollo Global Management, and a $575 million revolving credit facility from Deutsche Bank and Bank of America.

The market for debtor-in-possession financing has shrunk as traditional lenders have stopped activity in the financial downturn. Smaller companies like Big 10 and Fluid Routing Solutions can struggle to secure DIP, Blechman said.

The DIP strategy is a new one for Sun Capital, but involves the same kinds of skills that Sun uses every day, which is helping troubled companies turn around, Blechman said.

“The basic point of what we’re doing is supporting a business,” he said.