Fund Partially Owned by J.C. Flowers Files for Bankruptcy

WILMINGTON, Del. (Reuters) – Partnerships overseen by private equity investor J. Christopher Flowers, that were set up to invest in a German bank, filed for bankruptcy on Thursday.

The nine partnerships were established in 2006 to acquire a 26 percent stake in HSH Nordbank AG [HSH.UL], the world’s largest provider of shipping finance, for 1.25 billion euros, according to documents filed in Delaware’s bankruptcy court.

The partnerships hold the HSH Nordbank stock on behalf of investment trusts, whose beneficiaries are primarily investors in J.C. Flowers Fund II.

The partnerships have outstanding debt of about 383 million euros ($540 million), according to court documents.

People familiar with the bankruptcy said the partnerships had total assets of $680 million.

Each of the partnerships was advised by JC Flowers and Flowers was a direct or indirect partner of several.

JC Flowers chief financial officer, Daniel Katsikas, said the bankruptcy will give the partnerships “breathing room” to work out a plan to restructure their debt while preventing a foreclosure on their holdings of HSH Nordbank shares, according to court documents.

If seized, the shares would likely be sold at “fire-sale prices,” the filing said.

The partnerships were set up in 2006 and received unsecured term and revolving loans of 375 million euros from ABN AMRO bank to fund the purchase of HSH Nordbank shares.

Dividend payments from HSH Nordbank were used to make payments on the loan.

The partnerships were forced by the global financial turmoil in 2008 to renegotiate the terms of their loans. That process was complicated by the 2008 recapitalization of HSH Nordbank by the German government which diluted the stake held by the partnerships.

In September, after lengthy talks, the lenders demanded immediate repayment of all outstanding loans, including the term loan which did not mature until 2011.

Around the same time, six banks owed a combined $27.8 million filed an involuntary Chapter 7 bankruptcy petition against three partnership funds. That was brought by Commerzbank (CBKG.DE) AG, Lloyds TSB Bank Plc (LLOY.L), ABN AMRO Bank NV [ABNNV.UL], Calyon (CAGR.PA), Royal Bank of Scotland (RBS.L) and Landsbanki Islands hf.

Six of the partnerships filed for bankruptcy on Thursday. At the first bankruptcy hearing, scheduled for Friday, lawyers for the partnerships will ask that the three Chapter 7 cases be converted to voluntary Chapter 11 cases, according to court documents.

JC Flowers did not immediately return a call for comment.

The case is In re HSH Delaware GP LLC et al, U.S. Bankruptcy Court, District of Delaware, No. 10-10187.

By Tom Hals