David Lobel, the founder of middle market buyout firm Sentinel Capital Partners, is not going to turn his firm into a distressed debt house just because the assets look attractive right now. In comments made on a panel at today’s at the PEA conference, Lobel said his firm takes a different approach.
Say a debtholder of a company who’s debt is trading at distressed levels wants to sell and your firm is interested in the underlying company. Rather than go off-strategy and purchase that debt from the lenders in the hopes of taking control of the company through a bankruptcy process, Lobel says his firm approachs the company’s management and board.
“The way to do debt-to-own in a way that hedge funds and other buyers of debt cannot, is, instead of working with the lenders who are selling, go to the company. Invest in the company, and get the company to take on the debt, (in the form of a bank loan)” he said. Lobel explained that the banks will be happier to lend the money to the company and wipe away the existing debt holders than to transfer the loans to yet another party.
From my understanding, the company can use the money from the private equity firm, be it a majority or minority stake, to pay down some of that outstanding debt before it takes it on, or for operations to spare itself from bankruptcy. Meanwhile, the PE firm has made an investment.
I talked to Lobel after the panel; he said his firm has done several such transactions in recent times but none of them were made public. He pointed to the firm’s $66.2 million recap of Castle Dental in 2003 as publicly disclosed example of this technique.The transaction’s press release had this quote from the company’s CEO describing the details of the deal:
The infusion of new equity into Castle Dental by Sentinel Capital Partners and the replacement of our senior credit facility with the new line of credit provided by GE Healthcare Services, substantially reduces our debt and provides Castle Dental a stable capital structure for the first time in several years.
Other panelists weighed in on the move–One panelist said “it’s riskier than buying the debt directly because of the confidentiality agreements and limited ability of private equity to participate. “It won’t be broadly adopted,” the panelist said.
John LeClaire of Goodwin Procter said, “The tax issues, including cancelling obligations, are significant” to such a transaction.
Bob Stefanowski of 3i said (among other things), “It’s a great place to be.”