Only a Matter of Time for TPG’s Aleris

Aleris, the aerospace supplier backed by TPG Capital, is preparing to file for Chapter 11 bankruptcy protection, according to Debtwire.

The company reportedly is looking for $400 million in DIP financing, has warned its lenders that it would be restructuring, and has hired advisors for the filing.

TPG purchased Aleris in December of 2006 for $1.7 billion, plus the assuming of $1.6 billion in debt. The equity check was not disclosed, but it came from fund TPG Partners V, a $15 billion pool that closed shortly after the deal. The fund includes such investments as Petco, Univision, Freescale Semiconductor, Baxter International, Neiman Marcus, Harrah’s, Coles Meyer, SunGard Data Systems, and TXU.

According to the most recent report from UTIMCO, TPG Parters V has an IRR of -12.29% and cash-on-cash return of 0.02x. It’s only two years old, so consider J-curve and all that. (Technically it’s three, since the firm began investing before the final close.) Fund IV and TPG Star had similarly bad-looking cash-on-cash returns.

It’s (theoretically) possible that each of those funds will get back above water, but TPG isn’t taking chances when it comes to regaining favor with its LPs. Late last year, the firm reduced the size of its $20 billion sixth fund by up to 10%, and today there are reports that it has cut a distressed financial services fund by 25 percent. TPG also ended talks this week to sell a stake of itself to investors, including Kuwait Investment Authority, CalPERS and CALSTRS.

Yesterday, Moody’s downgraded its ratings on $2.4 billion of Aleris’ debt securities. Its corporate family rating was downgraded from Caa1 to Caa3 with a “negative” outlook:

The Caa3 corporate family rating reflects our expectation that ongoing volume declines and resultant losses will contribute to very weak to negative coverage ratios, notwithstanding the company’s exercise of the PIK option in its 9% notes due 2014 from the December 2008 to June 2009 period, and an increase in an already highly leveraged position.

Whenever a buyout goes bad, I like to revisit comments made by the purchasers at the time of the deal. I’m not doing it to discourage people from talking about new deals, but more as an exercise in “what worked and didn’t.” Here’s some comments from “a person familiar with the deal,” who is surely a buy-side banker or TPG deal pro. According to the story, the firm had a net loss two years before the buyout, but booked a profit the year directly prior. That is also the year the company did some pretty large acquisitions. Integrating major acquisitions and just beginning to turn profits… Seems like the best time to take on a ton of debt! Speaking to The Daily Deal in 2006:

What TPG regarded as most appealing about Aleris, a person familiar with deal said, was its history of strong profit-margin growth.

“Aleris has fairly stable processing costs,” the source said. “So by driving more and more volume through it plants, it has been able to drive margins up.”

Aleris has grown quickly by acquiring other companies in recent years. Its largest deal was its agreement, first announced in March, to buy U.K.-based Corus Group PLC’s aluminum rolled products and extrusions divisions for €826 million ($1 billion).