LBO-Backed Bankruptcy List: 24 Total, No Mega-Busts in Q1

Last year, there were 49 total. This year, we’ve got half of that in the first quarter alone.

And despite a few hints that the economy is waking up, there is no shortage of companies teetering on the verge of bankruptcy. Download the spreadsheet below.

The main thing that might slow the growth of this list is the companies’ abilities to do distressed debt exchanges, which has kept the likes of Realogy, TPG and plenty others afloat.

The other crutch is covenant lite. Judging by liabilities, original deal values, and even the names of the sponsors, we have yet to see a true mega-buyout fall as yet. And we likely won’t until 2012 or 2013, thanks to generous lending terms like covenant lite and PIK toggles. By then, the hope is that the credit markets will be warm enough to refinance.

The biggest busts to date are TPG’s Aleris and KKR’s Masonite, clocking in at $4.2 billion and $2.6 billion in liabilities each. KKR lost $551 million in equity; TPG’s equity check wasn’t disclosed.

The biggest surprise in Q1 might be the failure of sister supermarkets Bi-Lo and Bruno’s, backed by Lone Star Funds. You’d think the grocers would be stealing away consumer’s dollars from the restaurants, yet there is just one restaurant, Versa Capital’s American Restaurant Group.

It’s true again that if you play near the fire (and own 80+ companies), you’re going to get burnt. Turnaround investor Sun Capital Partners has four companies on the list. Turnaround specialist Pegasus Capital Advisors has one.

There are a few repeat offender companies as well. CCMP Capital Advisors’ Pliant Corp., NRDC Equity Partners’ Fortunoff, and Versa’s American Restaurant are all considered “Chapter 22s,” since they’ve gone through bankruptcy restructurings before.

On to the list. This year, we’ve created a more comprehensive tracking method. Beyond just listing the basics, this spreadsheet now includes the year the investment was made, deal value, and, when available, the fund, equity amount, status of the company, and assets and liabilities of the company.

Like last year’s list, this list doesn’t include debt investments (like Apollo’s Lyondell), hedge fund investments, (unless it was made alongside a buyout fund), or PIPEs. Only buyouts. I’ve made a separate section for minority investments at the bottom; however, that list is not comprehensive. Please let us know if we’ve overlooked one that fits those criteria.

LBO-Backed Bankruptcy List Q1 3.31.2009

LBO-Backed Bankruptcies 2009: One Month, 11 Down
The Final List: 49 PE-Backed Bankruptcies in 2008
What The KB Toys Bankruptcy Means for Toys R Us
Three Weeks To Go: 45 PE-backed Bankruptcies
Default Update: Percentage of PE-backed Bankruptcies Falls, S&P Reports
KKR Could Grab “Biggest Bankruptcy”
Year Over Year Bankrupcties: The Class of 2007
Revisited: LBO-Backed Bankruptcies, Class of 2008
Taking Stock of Bankrupt Portfolio Companies
Only a Matter of Time for TPG’s Aleris

1 Comment

  • A colleague recently sent me this:

    There is a lot of talk about zombie banks so burdened with debt that, while still just about alive, they are too weak to fulfil their normal functions – such as extending credit. There is less talk about zombie companies, but arguably as measures to unfreeze the banks begin to have an effect, the companies may turn out to be the bigger problem.

    The afflicted firms are those that succumbed to fashion in the days of easy credit, and took on a mountain of debt. This may have been for acquisitions, or because gearing up was encouraged to enable boards to return cash to shareholders. Or it may have been that the business was subject to a leveraged buyout by one of the ­private-equity houses.

    The actual reason matters less than the problem, which is similar in most cases. The value of the business has ­collapsed so the equity is virtually worthless, but the business is trading well enough to service its debts and not to be in any imminent danger of breaching its covenants. There are dozens, perhaps even hundreds, of businesses like this.

    They are stable but not going anywhere. There is no incentive either for the banks to pull the plug or for the bondholders to take a haircut – accept a loss – so that the business can be recapitalised. Meanwhile the business has no money, all its cashflow goes on debt servicing and the equity is almost worthless, so it cannot be used for acquisitions.

    Managements of such firms have no incentive to drive them forward because their share-option schemes will never pay out. For shareholders, the returns are too poor to encourage an injection of further funds to pay off the debt.

    A lot of these businesses languish in the buyout funds that invested so heavily until three years ago. They are not necessarily bad ­businesses but, saddled with the wrong financial structure, fail to fulfil their potential. They make for an uncomfortable legacy of the time when financial engineering ruled the roost.

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