Lenders Look to Sponsor After Terreal Loan Default

LONDON (Reuters) – Creditors of French building materials manufacturer Terreal are urgently seeking dialogue with its private equity owner, LBO France, after Terreal defaulted on a 915 million euro loan, banking sources said.

Terreal failed a leverage covenant test last Friday on the loan, which specified that its leverage ratio must be eight times and the company instead reported leverage of 8.4 times, they added.

Many highly leveraged companies in danger of breaching covenants, most recently Ineos Group [INEOSP.UL], have approached their banking syndicates in advance for waivers and initiated a dialogue, but Terreal’s syndicate have had little contact with sponsor LBO France, sources said.

“They (LBO France) have just reported a breach and that’s it, it’s very unusual,” a senior investor said.

Terreal’s all-senior loan, which was arranged by ING, is now quoted in the secondary market at a steep discount of 22-32 percent of face value, which indicates distress.

While waivers and amendments on the leveraged loans backing private equity buyouts are multiplying amid Europe’s economic slowdown, actual covenant breaches remain rare but are forecast to rise.

To date, banking syndicates have been prepared to grant waivers for less serious covenant infringements, but have expected private equity firms to support their investments by injecting new equity into businesses in more serious cases.

“We would expect LBO France to put more money in but it wouldn’t be a shock if they didn’t. But we would expect a dialogue and they are not engaging,” a senior investor said.

Private equity firms active in Europe have been willing to support their investments so far, such as KKR and Doughty Hanson’s 140 million euro equity injection into German car parts and service station chain ATU in February, but the severity of the slowdown suggests that the situation is about to change.

“We will finally get to see which sponsors are responsible,” a banker close to the deal said.

Terreal’s lenders now have a period ranging from three weeks to three months to find a solution and are considering their options. These include accelerating the debt, or reaching a consensual agreement with LBO France, and lenders are forming a steering committee, sources said.

“It could be up to the lenders to come up with something on the assumption that LBO France won’t do anything,” a senior investor said.

Terreal, which specialises in terracotta products including clay roof tiles and clay wall claddings, was bought by LBO France from private equity firm Eurazeo in 2005.

LBO France undertook a 915 million euro recapitalisation of the company’s original 795 million euro debt last year which increased the company’s debt in order to pay LBO France a dividend and lower borrowing costs.

Bankers say that, although Terreal’s business is viable, demand for its products has shrunk as the construction sector and the housing market contracted.

The poor outlook for the business could mean that the company is heading for French sauvegarde administration which is regarded as being more favourable to borrowers than lenders.

“There is a decent possibility that the lenders will go to court to initiate a French-style administration,” the banker said.

(Reporting by Tessa Walsh; editing by John Stonestreet)