As much as £4.3 billion of private equity buyout loans will be up for refinancing this year, putting many buyout firms in a taxing position with lenders, according to London-based law firm Trowers& Hamlins (T&H).
“Until recently refinancing the debt on a private equity buyout was straightforward and if the original lender did not want to play ball the borrower could always turn to another player,” Andrew Watkins, corporate partner at T& H, said in a statement. In today’s severe lending environment, however, T&H anticipates banks to place tougher conditions on covenants.
It also expects that a struggling private equity-backed company that approaches banks for a covenant waiver- a grace period to rectify breached conditions- will be faced with stringent terms and conditions as well as possible fees.
“Private equity companies that are in breach of – or look like they might breach – their existing covenant conditions are in an even tougher position…Any company that fails to approach its lender from a position of strength may find itself leaving with a bloody nose,” Watkins said.
Many firms dourly anticipate having to renegotiate covenants with lenders throughout 2009 as part of an active portfolio management strategy, according to one London-based mid-market GP.
In January UK mid-market private equity firm Cognetas began debt refinancing talks with lenders for two of its portfolio companies that had breached covenants: UK-based plastic surgery firm Covenant Healthcare and French glass packaging company SGD. In February The Carlyle Group and TPG also moved to appease lenders, proposing cash injections into debt-laden portfolio companies in exchange for write downs on debt.
Watkins urged private equity-backed companies nearing loan renewal to be proactive and adopt a strong negotiating position during what he said was the toughest lending conditions seen for a long time.
“Even where banks are lending, private equity-backed companies can no longer depend on them to renew their financing on the same terms,” he said.
T & H used research from Nottingham University Business School’s Centre for Management Buyout Research (CMBOR) to calculate the leverage taken out for the UK buyout market between 2002 and 2004, to calculate the number and value of loans that will be up for renewal. It then deducted intervening exits based on sample portfolio of large buyouts from the British Private Equity and Venture Capital Association’s Report on the Performance of Portfolio Companies 2008.